HOUSTON BUSINESS REVIEW

THE CPA CORNER: BUSINESS/INDIVIDUALS AND FORM K-1... FOR 2004
By C. Kevin Moore

Kevin Moore is a Principal of C. Kevin Moore & Associates and has two decades of experience as a Certified Public Accountant. Each week he provides the information you need to grow and protect your business.

The Schedule K-1 is used to report income and other distributions from partnerships, S corporations and some estates and trusts. Accurate filing of the forms is important because the IRS matches income from Schedules K-1 to other tax returns. For tax year 2003, more than 25 million Schedule K-1 forms were filed reporting approximately $1 trillion in income to partners, shareholders and some estate and trust beneficiaries. A matching program to ensure all Schedule K-1 income is being reported is critical to the IRS’ tax administration policies.

New partnership and S corporation Schedules K-1 were released for 2004. To reduce errors the IRS encourages electronic filing of Schedules K-1 and other tax forms. Additional reminders to businesses, individuals and tax professionals include:

For flow-through entities issuing Schedules K-1

Ensure use of the codes on page 2 of the new Schedules K-1 to identify items in lines 10 through 17 (Form 1120-S K-1) and lines 11 through 20 (Form 1065 K-1).

Ensure the correct taxpayer identification numbers are used on Schedules K-1, particularly those issued to owners of entities disregarded for federal tax purposes (i.e. Single Member Limited Liability Companies). In these situations, Schedule K-1 must be issued to the owner of the entity and reflect that owner’s identification number.

Identify “amended” information by checking the appropriate box on the Schedule K-1.

For recipients of Schedules K-1

Report income in the proper location on individual returns as instructed on Schedule K-1, page 2, and in the instructions.

Avoid netting or combining income against separately stated losses or expenses. Refer to Form 8582, Passive Activity Loss Limitation, for instructions on properly deducting passive activity losses. Ordinary business income should be reported separately from other related deductions, such as un-reimbursed partnership expenses or Section 179 expenses. Refer to the Schedule E instructions for information on properly accounting for deductions related to Schedule K-1 income.

Report deductible “At Risk” or Basis Limitation losses carried forward from prior years on a separate line from current year transactions. Do not combine (net) them with any current year amounts.

Identify “estimated” K-1 income. When the Schedule K-1 has not been received at the time the Form 1040 is filed, the income should be estimated. Form 8082, Notice of Inconsistent Treatment or Amended Return, generally should be used to identify estimated K-1 income or when the investor disagrees with the amounts reported on the K-1.

Be careful and record items properly… they will be matched…