Question:
Can you spend some time talking about Schedule K’s, specifically for individuals such as myself who own stock in a company that mails this tax document to partners. It’s a little confusing as to what you report to the IRS and when you do report it.

Answer:
In recent years, many investments that have been made by investors include limited partnerships or Master Limited Partnerships, especially in energy.  The partnership files a Form 1065 and reports the partners’ shares on a 1065 Schedule K-1. More recently, many of these partnerships are switching to corporations which will then convert to stock rather than partnership interests or units. Dividends paid on stock get reported on a 1099DIV.  K-1s may be issued to shareholders of an S Corporation via a 1120S K-1 or to beneficiaries of estate and trusts using 1041 K-1.

The K-1 reporting can be so complicated.  The easy fields you will see on your K-1 might be rental income, ordinary business income or the easiest…interest and dividends.  Quite often they will provide supplemental pages of information which becomes much more complicated.  The tricky reporting about partnerships is if you buy them through your brokerage firm and then sell them.  The information on the cost basis (what you paid for the investment) is not usually correct and you have to use the supplemental pages from the K-1 to guide you in the proper reporting of the cost basis adjustments.  Basically, the partnerships will make distributions to their partners over the years which impacts their original cost basis and the annual activity also impacts the cost basis.  The partnership keeps track of this not the brokerage firm.  It is in the supplemental information where we find this useful information including additional reporting not reflected on the main K-1 schedule.  The impact of all of this depends on how much you own.   Most tax software will have an input sheet to enter the Schedule K-1 information.  Make sure you put it into the correct K-1 input such as partnership, S Corp or fiduciary for estate or trust. The income will automatically flow to the proper schedules on the Federal Form 1040.  Any dispositions may be complicated enough to seek tax advice.

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