A Schedule K-1 is a type of tax document used to report partnership incomes, losses, and dividends. Each individual partner is obligated to complete one of these forms, whenever necessary, and must include it with their respective personal tax returns.
The tax obligation recognized on a Schedule K-1 is determined by each partner’s basis in the partnership. This basis is determined by changes in capital contributions, as well as changes in partner income.
For example, a partner in a company decides to contribute $60,000 in cash to a partnership, and the partner’s share of income for that year is $5,000. The total basis is $65,000, less any withdrawals the partner might take. This number is important, because if the basis sums to zero, any additional payments to the partner may be taxed as ordinary income.