- The Washington Times - Tuesday, February 25, 2003

Completing income tax returns is a chore for most small-business owners. Those with partners or fellow shareholders have even bigger tasks layers of extra paperwork that can get rather intense.
One of the most notorious business tax forms is Schedule K-1-P, Partner's or Shareholder's Share of Income, Deductions, Credits and Recapture. This is how many small firms partnerships, corporations and limited-liability companies must report to the government the income and expenses that their owners can claim. It requires information from other Internal Revenue Service (IRS) forms, and numbers entered on it must in turn be relayed to 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 (CPA) 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 1040s of the partners. 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 also might 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 the fact 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 each partner's share to the IRS and then apply that percentage throughout the return.
W.G. Spoor, another 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 "passed through" to shareholders, who pay individual taxes on the income in much the same way 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 it also requires a percentage to be reported and followed.
The limited-liability company is growing in popularity. It has more legal protection than partnerships do, but it's not a corporation.
Owners must determine whether the firm should be classified as a partnership or a corporation for tax purposes and file forms accordingly.


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