Small partnerships' taxes complex
By Joyce M. Rosenberg
Associated Press
NEW YORK — Completing income tax returns is a chore for most small-business owners. Those with partners or fellow shareholders have an even bigger trial — layers of extra paperwork that can get pretty intense.
One of the most notorious business tax forms is Schedule K-1, Partner's (or Shareholder's) Share of Income, Credits, Deductions, etc. This is how many small partnerships, corporations and limited-liability companies must report to the government their income and the expenses that their owners can claim. It requires information from other IRS forms, and numbers entered on the K-1 must in turn be relayed to still other forms.
"Schedule K-1 can get complicated fast, so if you don't know what you're doing, get the help of a professional," said Bob Doyle, a certified public accountant with Spoor, Doyle & Associates in St. Petersburg, Fla.
Whether you get that help or not, you should be familiar with the business tax forms you're required to complete.
When you're a sole proprietor, filing your business return means attaching Schedule C to your 1040. That can get complicated because you need other forms when you claim certain deductions. For example, for the Section 179 deduction for equipment, you'll need to attach Form 4562, Depreciation and Amortization. Or, if you've had transactions such as business property sales, you'll need Form 4797, Sales of Business Property.
Chances are you'll also need to include Schedule SE, Self-Employment Tax.
When there's more than one owner, even more forms are required.
A partnership must file IRS Form 1065, U.S. Return of Partnership Income, and then a Schedule K-1 for each partner. Those documents are not, however, filed with the partners' 1040s. They'll need to complete Schedule E, Supplemental Income and Loss, using information from the K-1 and then attach Schedule E to their individual returns.
They might also need information from the K-1 to complete other 1040 schedules, such as Schedule B, Interest and Ordinary Dividends.
What can make a partnership return particularly complicated is that companies can be structured, and profits split, any way the partners see fit. For example, a partnership of two people might not opt for a 50-50 division; you have to report to the IRS what each partner's share is, and then apply that percentage throughout the return.
W.G. Spoor, also a CPA at Spoor, Doyle & Associates, used a Section 179 deduction as an example: "It follows the partners' percentage."
Many small companies are organized as S corporations, which are named for an Internal Revenue Code provision. In S corporations, company earnings are not taxed, but are instead "passed through" to shareholders, who pay individual taxes on the income in much the same way that partners do. There's no double taxation of earnings to the company and the shareholders, as in more traditional C corporations.
In an S corporation, the company files Form 1120S, U.S. Income Tax Return for an S Corporation, as well as a Schedule K-1 for each shareholder. Information is entered on Schedule E and other 1040 schedules, as in the case of partnerships.
The corporate K-1 can be as complicated as the partnership version because it also requires a percentage to be reported and followed.
