1115.040.01 Partnerships, S Corporations, and Corporations – DSS Manuals

A partnership is a type of business in which multiple individuals manage the business and are equally liable for its debts. Each partner shares equal responsibility for the company’s profits and losses, and its debts and liabilities. The partnership does not pay income taxes. Each partner reports his/her share of the business’s profits and losses on his/her individual tax return.

Common forms used to verify this income are:

1040 – U.S. Individual Income Tax Return

1065 – U.S. Return of Partnership Income

Schedule K-1(Form 1065) – Partner’s Share of Income, Deductions, Credits, etc. (summarizes each shareholder’s separate shares)

Schedule D (Form 1065) – Capital Gains and Losses; and

1099 – This is a form used by businesses to report certain business transactions to the IRS

EXAMPLE: 1099 B reports the sale of stocks, bonds, etc., 1099 DIV reports dividends paid, and 1099 G reports tax refunds.

S Corporations are set up to limit liability and allow owners to pay income tax as a sole proprietor or partner. Owners are considered employees and are not considered self-employed. They are not entitled to the costs of producing income.

Common forms used to verify this income are:

1040 – U.S. Individual Income Tax Return

1120S – U.S. Income Tax Return for an S Corporation

Schedule K-1(Form 1120) – Shareholder’s Share of Income, Deductions, Credits, etc. (summarizes each shareholder’s separate shares)

Schedule K (Form 1120S) – Shareholder’s Share of Income, Deductions, Credits, etc. (summarizes the Corporation’s income, credits, deductions, etc. reportable by the Shareholders); and

Schedule D (Form 1120S) Capital Gains and Losses and Built-In Gains

NOTE: Schedule K is a section on the 1120S – U.S. Income Tax Return for an S Corporation.

In a Corporation, the owner is considered an employee of the corporation and receives a salary. The Corporation pays taxes on profits left after salaries, bonuses, overhead, and expenses are paid. Self-employment expenses are not allowed.

Common forms used to verify this income are:

1040 – U.S. Individual Income Tax Return

1120 – U.S. Corporation Income Tax Return

1120A – U.S. Corporation Short Form Income Tax Return

Schedule D (Form 1120) – Capital Gains and Losses; and

Schedule M-3 (Form 1120) – Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More