You'll need to issue your partner a 1099-MISC with their cut reported in box 1, 2 or 3 of that form. Which box it goes in, depends on the specific investment and what box it was reported to you in, on the K-1 you received. It also matters if that was a 1065 K-1, 1120 K-1 or 1120-S K-1. Otherwise, you pay tax on the entire amount. This "can" get tricky with TurboTax and I would highly advise you seek professional help. This would be especially called for if your state taxes personal income.
Thanks for that. I got a 1065 K-1. Is it too late for me to issue her a 1099-MISC? It's the first year and the interest on it is very small (less than $100) but I am concerned about what happens when the investment ends and I get hit with a big tax bill. Can I make an adjustment next year instead?
Yikes. Thank you so much for your explanation and wise advice!
You need professional help, any way you look at it. A 1065 K-1 is for a multi-member LLC or partnership. Apparently, "your" partner does not have any involvement in the partnership you got the K-1 for. Technically speaking, whatever you split with your friend is considered a gift from you to them, and you are the one who pays taxes on the entire distribution as reported on the K-1 as being received by you.
Then to top that off, if your "gift" to your friend is more than $15K in any one tax year, "you" are the one who has to file IRS Form 709 - Gift Tax Return. Now that's just at the federal level. So if your state also taxes personal income, that doubles the issues for you to deal with. So please seek professional help, as you will find it to be significantly cheaper that if you do things wrong and end up having to pay the IRS (as well as your state maybe) back taxes, interest, fines and penalties because you made one little teeny-tiny mistake.
"Can I make an adjustment next year instead? "
No. All income and deductible expenses are reported in the tax year they actually occur. Get professional help please. If you don't, then chances are high that you will be kicking yourself about 24-36 months from now when you get audited.