A Schedule K-1 is an informational return contains a partner’s share of their partnership’s tax items. You need to include the items in this form on your tax return and pay taxes on these amounts.
How Partnerships Are Taxed
Partnerships are pass-through entities. This means that the partnership doesn’t pay taxes—it passes it’s tax items through to the partners.
For example, if you own half of a partnership, you would include half of its income other tax items on your individual income tax return. This is unlike a corporation, which files its own tax return and pays taxes as an entity separate from its shareholders.
Your tax return may become more complicated if you receive a Schedule K-1. Use a qualified tax preparer to make sure you are properly including the partnership items on your individual tax return.
The good news is that you can also include the partnership’s losses (subject to limits), deductions, and credits to offset your income.
Partnership Tax Problems
Be aware that the IRS also receives a copy of your Schedule K-1. If you don’t include the correct tax items on your return, the IRS will most likely notice the discrepancy.
You should also understand that you are being taxed on your distributive share of partnership income. This includes your share of the partnership’s income for the year. This may be different from the amount that the partnership actually distributes to you during the tax year.
Make sure you get good legal and tax advice before entering into a partnership. You need to understand what the rules are regarding partnership distributions so that you aren’t stuck with a tax bill without having the means to pay for it.
If you end up getting audited or given a large tax bill because of tax due on partnership income, don’t ignore the problem. The IRS can come after your personal bank accounts, wages, and other assets to collect past-due tax on partnership income.
A tax resolution attorney can help you figure out your options. You may need to stop impending collection actions, negotiate an installment agreement, or use other means to resolve your tax problems.
Get help with IRS tax problems by calling The Gartzman Law Firm at (770) 939-7710. We can listen to your concerns and help you find the best tax resolution strategy for your case.