The Schedule K-1 form is used to report the income of the partners in the business, SCorps and other business entities. Schedule K-1 helps the entity track each partner's individual earnings. The K-1 form is quite similar to 1099
, the only difference being that the latter serves self-employed individuals and freelancers.
The individual agreements of the partnerships influence the information on Schedule K-1. For example, the general partners in the contract are responsible for all the other partners with limited liability. The general partners are responsible for reporting individual income using Schedule K-1.
The form includes details about individual profits, losses, credit information, investment details and other distribution of wealth and assets generated by the partnership. Apart from partnerships, the K-1 form is also used to calculate tax returns for S-Corp
The K-1 includes details about each partner, like their investments in the business, shares and income. The idea is to calculate a partner's stake in the company, or basis. So your basis (stake) as a partner is decided based on your contributions and profits.
Alternatively, if you have incurred losses in a partnership, they will reduce your basis in a partnership. If you are making a certain percentage of profit, that will be counted as your basis in the partnership. If your profit increases, your basis also increases.
It's important to note that Schedule K-1 collects information from the partners and reports it to the IRS. The K-1 form is sent to the IRS and is attached to the 1065 form.