Video instructions and help with filling out and completing What Is Form 1041 Schedule K 1

Instructions and Help about What Is Form 1041 Schedule K 1

Hi there this is aardvark tax TV I'm Sean kenefick an enrolled agent and customer service representative here at aardvark tax today we're going to talk about flow through entities and the schedule k-1 this video is part of a complete continuing education course available at our website w wrff etags comm in most cases when a single person or married couple owned a business they use the Schedule C to report their income but when a taxpayer partners to do business with someone else or many other someone else's or requires liability protection there's no longer an easy way to report the income that new entity generates to facilitate tax computation for these multi taxpayer conglomerates the IRS recognizes several different kinds of entities for tax purposes these entities include things like partnerships corporations and trusts a partnership is an arrangement where two or more taxpayers do business together and split the proceeds each person contributes money property labor or skill and expects to share in the profit and losses of the business some states require entity registration for partnerships which allows for limits of liability but the IRS does not require these kinds of things for partnerships the IRS does require however that partnerships fill out a separate 1165 tax return in addition to the 1040 tax returns that the partners individually provide partners in a partnership are not employees and should not receive w-2s or be on payroll instead all income that is generated to the partner through the partnerships flow to the individuals tax return through a storm call to schedule k-1 we'll talk more about k ones in a moment if your partner in a partnership you're going to have to pay self-employment tax like you would with a Schedule C a corporation is a separate legal entity that has been incorporated at the state level through a registration process established by law incorporated entities have legal rights and liabilities that are distinct from employees and shareholders and may conduct businesses either profit seeking businesses or as a not for profit seeking business in addition to legal personality richest corporations tend to have limited liability be owned by shareholders who can transfer their shares to others and are controlled by a board of directors who are normally elected or appointed by the shareholders there are two kinds of corporations the traditional c corporation and the more recent S corporation both corporations register at the state level and receive benefits such as limited liability but the way the corporations are taxed are different C corporations are taxed separately from their owners owners receive income from the C Corp in the form of dividends most major companies and many smaller companies are treated as C corporations for US federal tax income purposes there is a downside to being a C Corp from a tax perspective income for a C Corp is taxed at the corporate level then again at the individual level for owners when they receive dividends owners who work for a C corporation are also put on payroll and receive a w-2 S corporations get around the dividend double taxation by allowing income that the corporation receives to flow directly to the owners individual tax return much like a partnerships income income does S corporations were designed to be closely held entities and there are several rules that must be followed for those types of corporations first owners must apply to the IRS for special S corporation status additionally S corpse cannot have more than 100 shareholders the shareholders must be natural persons and United States citizens or residents and there can only be one class of stock owners who work for an S corp must pay themselves a fair wage through payroll and receive a w-2 for that income at the end of the year any monies that the corporation generates above that fair wage are exempt from self-employment taxes when they flow to the corporation owners C corporations report income on a form 1120 and S corporations report income on form 1120s a trust is a legal instrument for holding wealth generally a trust involves three quote unquote persons in its creation and administration a grantor who creates the trust a trustee who administers and manages the trust in its assets and then a beneficiary who receives the benefit of the administered property in the trust in some cases such as a revocable living trust one person serves as grant or trustee and beneficiary simultaneously until they die in other instances especially in a in an inheritance after death there will be different persons named to be trustee or beneficiary trust report income unformed 1041 when they file the return they use a schedule k-1 like s corpse and partnerships to report income for the trust beneficiaries a schedule k-1 is used by any flow-through entity to report a partner's shareholders or beneficiaries distributed share of income as we talked about earlier entities such as partnerships and S corporations do not pay income taxes themselves instead they file their tax returns as informational returns only this return will distribute the net profits to the shareholders or partners based upon their percentage of stock or how the partnership agreement reads for example if you own 50% of an S corporation and the corporation shows $100,000 profit you will receive a k1 for 50 percent of the net profit which in this case is $50,000 you would then file this $50,000 of income on your personal tax return because the company itself does not pay federal income tax the net profit is passed through to the owners who pay the income tax on their personal tax returns k1 s differ slightly depending on the organization creating them you'll quickly notice that schedule k1 s have many different fields this is because the income and losses generated by the entity needs to flow through two different parts of the individual tax return for instance ordinary