What It Is:
An Internal Revenue Service (IRS) Schedule K-1 is used to report a beneficiary's share of income, deductions, credits, and other items from pass-through entities. These generally include limited partnerships, S Corporations, income trusts, and limited liability companies.
How It Works/Example:
U.S. income tax law requires a pass-through entity such as a Master Limited Partnership (MLP) schedule K-1 to each unitholder as a record of that unitholder's share of the partnership's income. For example, if you had an interest in Company XYZ partnership and received $1,000 of income from the partnership last year, your K-1 would reflect that income and you would use this form to prepare your personal tax return.
Why It Matters:
Taxpayers should always be sure to seek competent tax advice when investing in trusts and partnerships: the income can trigger other issues with unrelated business taxable income, alternative minimum taxes, or requirements for filing tax returns in the state where the partnership or trust operates.
Also it is important to note that the IRS does not have a deadline for partnerships to mail K-1s to their unitholders, so it is important for investors to contact their partnerships regarding the mailing date. In many cases, partnerships make the schedules available online.
If you're interested in learning more about tax issues, including how to reduce your annual tax bill, be sure to read one of our most popular articles on the subject -- Tax Law Changes: The 5 Smartest Moves to Make in 2011.