K-1 earnings never distributed and never will be. Are the k-1 earnings still taxable?

[jjdolhonde]

• K-1 earnings reported in 2014. Cash distribution was not received and never will be. Is the k-1 income still taxed?

[JulieCo · Accepted solution]

Yes, earnings reported on a K-1 are taxable and need to be reported on your tax return.  This is because the income tax liability is being passed through the business or fiduciary entity to the ones who have a financial interest in it.   Since the income is not being taxed to the entity where the income was earned, the receivers of the K-1 forms get taxed on the income.  

Here is some more information:  

The United States tax code allows certain types of entities to utilize pass-through taxation. This effectively shifts the income tax liability from the entity earning the income to those who have a beneficial interest in it. The Schedule K-1 is the form that reports the amounts that are passed through to each party that has an interest in the entity. From:  What is a Schedule K-1 Form?

[jjdolhonde]

I understand the pass through reporting. But my question is what if you have previously reported k-1 earnings and paid tx but have not and never receive a cash distribution. Haven't you paid tax on earnings that you have not benefitted from in any way?

[JulieCo]

The IRS is going to tax the earnings, though, and when the earnings are shown on the K-1, the recipient gets taxed.  What type of entity (LLC, Trust, etc) is giving you the K-1?   For a  partnership (LLC), the income has to get passed through and the tax paid by the K-1 recipient whether they received any income or not.  A trust, though, can designate which earnings have been distributed and then the Trust will pay tax on the earnings not distributed.

[jjdolhonde]

It's not a trust

[jjdolhonde]

It is not a trust

[JulieCo]

Ok.  As noted before, the partnerships and Scorps are pass-through entities where the income that was earned (and even though you did not "benefit" from it, the income was earned by the entity) and the IRS requires that it be taxed.  I guess one way to look at it is when you do receive a distribution from it, you won't be taxed at that time as you will already have been taxed on the income.

[jjdolhonde]

Lot of shenanigans going on. The k-1 could be understated or overstated. It's under audit. Just doesn't seem equitable .

[JulieCo]

Ok.  If being audited, maybe something will turn up if something was being reported to you incorrectly.

[jjdolhonde]

But do you think under current law that earnings reported but never received are still taxable?  Is there no remedy?

[JulieCo]

Yes.  And you will want to seek professional legal advice related to any remedies that may be available.

[doublejay07]

Hi JulieCo-  What if the total K-1 earnings reported have not been fully received (only partially received), and will not be received anytime soon (or possibly ever) because the company account no longer has the funds available to complete payment distrubution due to delayed expenses or recent bills/expenses that reduced the funds available?   Yet, taxes are due now on the K-1 earnings which may never be received...

[Sheriljordan]

Did you ever get this resolved?  I'm in the same situation right now.  Being taxes on nearly $9000 of royalties and straddle income I never recieved.  I sold the shares back in June and so I will never see any distribution.  To add insult to injury I'm also paying taxes on the short term capital gain on the sale.  I'd really love to hear how your situation worked out.  I feel like I'm being $^&* without even being bought dinner. 

[DianeW777]

You can add the income that was taxed and never received as part of the cost basis of the shares you sold back.  This is where the recovery takes place on the sale. 

You may want to seek help from a tax professional to complete your tax return for the best tax advantage.

@Sheriljordon

[skibumm2024]

Yes, you still get taxed. It's the best kept secret of the IRS. SMB's get taxed for money they'll never really receive. The business requires cash-flow, so the end of the year profits cannot be distributed and many ever be. The IRS still gets the cut. I've been a business owner for 8 years and haven't come close to taking a full distribution but **bleep** if the IRS didn't get paid. The whole system is corrupt. Would love to hear from other business owners on how they deal with this. There has to be a way to minimize your tax liability legally, especially when you never receive that income.