September 23, 2015
The following applies to partners in the local pre-jurisdictions of DC, Maryland and Virginia. When you first become a law firm partner, your federal taxes become very difficult and you can find them daunting. Prior to your partnership, your taxes probably revolved around a W-2 and tax return preparation was rather straight forward. As soon as you become a law firm partner, this process becomes complicated as you have to familiarize yourself with K-1 Forms.
Congratulations, You Are Now a Law Firm Partner! What about Your New Tax Forms?
There are three versions of Schedule K-1, for partnerships, for a trust and for S corporations. This post relates to partnerships. These forms report income losses, deductions and credits and can be about 20-30 pages in length, particularly when you have to file in several states. There are certain schedules that are common with your K-1. The first is Schedule E.
Schedule E is the primary form where you report your ordinary income and guaranteed payments, if those are applicable. Schedule E is the form that reports your self- employment tax that you are required to pay. These include your social security and Medicare taxes that used to be withheld when you were an employee, but now as a partner you are responsible for paying those taxes as well. If your law firm has international offices, you will also need to address Form 1116.
Form 1116, is designed for those individuals that need to claim the foreign tax credit. This is the form that reports the foreign taxes that your law firm paid on your behalf. It’s a very complicated form, and to be honest, I don’t think anybody can do it manually. You have to do it on a computer, but this is where you get those credits for the taxes that are paid to foreign countries.
The last two forms I’ll discuss are Schedule B and Schedule A. Schedule B is where you report your share of investment income, the interest in dividends that your law firm earns on their investments and flows through to you on the K-1. Schedule B is only necessary when you receive more than $1,500 of taxable interest or dividends. Finally, Schedule A reports your various deductions such as your charitable contributions and state taxes.
If you have any follow up questions you may contact me directly at elawrence(at)grfcpa.com
This article was originally posted on September 23, 2015 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at marketing@grfcpa.com.