Top K-1 Myths: Myth 7

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BY Scott Turner
August 24

“If you’ve seen one K-1, you’ve seen ONE  K-1″

This is a common phrase in the tax world and it is a nod to the fact that no two partnership K-1 packets are the same.

However, the reality is that the same K-1 packet is given to more than a dozen different legal entity types,  all with different filing responsibilities and requiring specific data. The regulatory and reporting requirements are so vast and time-constrained that partnerships have gotten into the habit of providing all pieces of information that a partner/investor could need.

What does this mean? Partners receiving this information are faced with having too much and not enough information all at the same time. They are pouring over pages of details, trying to determine the applicability of the item to them, often not knowing whether it applies or not.


Think of your K-1 packet as the story you are telling for this partnership. And this story has a beginning, middle, and end.

Think of your K-1 packet as the story you are telling for this partnership. And this story has a beginning, middle, and end.

The beginning of your story

…should be focused on describing the partnership’s taxable income and the allocation of that income to the particular partner. This would be placed on the face-page of the K-1 and the overflow statements. Are the footnotes straightforward? Are they consistent across your portfolio of funds so that if the same investor receives multiple K-1s, they can quickly consolidate the information without making too many judgment calls?

The middle of your story

…is all about the investors and the specific information about the data you are providing to help the investors understand the federal data provided. What specific treatments need to be applied to the amounts listed at the beginning of the story? For example, individuals/trusts are going to be interested in passive/active determinations. A tax-exempt entity is going to be looking for specific unrelated business income purposes. Try to be as straightforward as you can and even identify the specific partners to which you are referring. Some of the reasons a K-1 is so confusing is that a legal entity is pouring over the document and does not understand what is relevant to them. Anything a partnership can do to make it clear would greatly reduce some of the anxiety associated with these documents. Wouldn’t it be nice to one day provide a customized K-1 with only the relevant information needed to each and every investor? We’re not too far from that reality.

Then finally, we have the end of the story,

…which could be classified as the “sweep”. Pick up state and local tax information as well as foreign information to aggregate these attributes with the same from your other K-1s. These are used to make final determinations as to state filing responsibilities and foreign income and international tax filing responsibilities. This part of the story would also benefit from standardization and consistency. The variety of presentation of this information is staggering, especially because the information is quite straightforward. This issue is likely caused by the tiering nature of partnerships but that’s all the more reason to work across the fund to create a more straightforward presentation.

It’s clear, based on the commonality of these myths, that the K-1 ecosystem is broken. But make no mistake, it is possible to fix.

Taking a breath and offering some standardization in the presentation of this tax information could eliminate a lot of headaches, including your own. Now is the time to start your digital journey. Learn how K1x can help.

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