Schedule K-1

Definition

The form that reports each owner's share of a pass-through's income.

Why It Matters

The number on it is what you are taxed on, and it is not the cash you received. A partnership or S corporation pays no federal tax of its own, so every dollar of profit is allocated to the owners whether or not any of it was distributed. That is how a profitable year with the cash tied up in inventory or a loan sweep produces a tax bill nobody planned for, and it is the reason the tax distribution clause exists at all. Search fund investors meet the same form from the other side, and a fund whose companies operate in several states sends a state K-1 for each of them. Ask when yours will arrive before your first filing deadline, because a late one moves your personal return with it.

In numbers: A member holding 20% of an LLC that earned $400,000 receives a K-1 for $80,000 and owes tax on it in a year the business distributed nothing.