A Beginner’s Guide to K-1s for Private Placement Investors

The following should not be construed as professional tax advice.  We provide this guide for general educational purposes only.  Please consult with a qualified tax professional for guidance specific to your individual situation.

As an accredited investor participating in private placements, you’ve likely encountered Form K-1 (aka Form 1065) at tax time. It is an important document for reporting income, deductions, and credits from your investments in partnerships and other pass-through entities. If you’re new to private placements or navigating the tax implications of these investments, here’s what you need to know to prepare for tax season.

What is a Schedule K-1?

A Schedule K-1 is a tax document issued by partnerships, limited liability companies (LLCs), and other pass-through entities. It reports each limited partner's share of income, deductions, and tax liabilities. Unlike traditional stock investments, where investors receive a 1099-DIV or 1099-INT, private placement investors in partnerships receive a K-1, which must be reported on their personal tax returns.

Key Information on a K-1

Your K-1 will typically include the following:

• Ordinary business income or loss – Your share of the partnership's operating profits or losses.
• Dividends and interest income – If the partnership earned these, they are passed through to you.
• Capital gains and losses – If the entity sold assets during the year, gains or losses are allocated to investors.
• Deductions and credits – Some expenses, such as depreciation or tax credits, may reduce your tax liability.
• Other tax implications – Items like alternative minimum tax (AMT) adjustments or self-employment income may be listed.

What Type of Investments Issue K-1s?

Entities that issue K-1s are typically pass-through entities. This means that they do not pay income tax at the corporate level. Instead, they pass earnings, deductions, and tax liabilities directly to their investors or members.

The most common entities issuing K-1s include partnerships (LPs, LLPs, and general partnerships), limited liability companies (LLCs) taxed as partnerships, and S corporations. Additionally, trusts and estates that distribute income to beneficiaries also issue K-1s.

In the private markets, investors often receive K-1s from private equity funds, venture capital funds, real estate partnerships, and hedge funds structured as partnerships. 

When Private Placement Investors Should Expect a K-1

Investors in private companies may not receive a K-1 for their investment every year. Certain events that trigger a pass-through of gains or losses will necessitate a K-1 for tax reporting purposes. For investments on EquityZen's marketplace these events include:

• Pre-IPO sales – If you sell your interest in an EquityZen fund via an Express Deal in a given year.
• Express Deal purchases – if you invest in an EquityZen fund via an Express Deal in a given year.
• Purchases via a dual layer investment vehicle – if you invest in an EquityZen fund that invests in a fund managed by a third party.
• Ownership transfers – if you transfer ownership of an investment in an EquityZen fund that closed in a given year.
• Company exit events – if a private company goes public or has a merger or acquisition and you receive a distribution of shares or cash¹
• Bankruptcy – if you invested in a fund in which the underlying private company’s liquidation or bankruptcy was finalized in a given year.

Why the K-1 Matters for Private Placement Investors

Private placements often involve investing in limited partnerships (LPs) or limited liability companies (LLCs) structured as pass-through entities. These structures offer tax advantages, such as passing income and deductions directly to investors rather than facing corporate taxation. However, this also means you must report and pay taxes on your share of the entity’s earnings, even if you did not receive a cash distribution.

What to Watch for on Your K-1

• Timing Delays – K-1s are often issued later than traditional tax forms (e.g., 1099s), sometimes in March or even April. If you invest in multiple private placements, consider filing for an extension to avoid amending your return later.
• Passive Activity Loss Rules – Many private placement investments generate losses due to depreciation and other deductions. These losses may be limited by passive activity loss rules. This means you can only deduct them against passive income, not wages or business income.
• UBTI Concerns for IRA Investors – If you hold private placements in a self-directed IRA, be aware of unrelated business taxable income (UBTI). If your investment generates UBTI over $1,000, your IRA may owe taxes. This would require you to file a separate tax return (Form 990-T).
• State Tax Filings – Some private placements operate in multiple states, requiring investors to file state tax returns where the entity does business, even if they don’t live in those states.

How to Prepare for Tax Season with a K-1

1. Know When to Expect It – Check with the fund manager or general partner about the expected delivery date of your K-1 to plan accordingly.
2. Review It Carefully – Errors on a K-1 can lead to tax complications. Ensure income and loss allocations match your expectations and compare them with past years.

Note that in accordance with IRS regulations, your Schedule K-1 often does not include brokerage fees and other transactional costs that may have been incurred at the time of your initial investment (or upon the sale of your interest in a fund, if applicable) in your tax cost basis shown on the K-1 form. These costs are often considered personal investment expenses rather than deductible partnership expenses and thus are not reportable on the partnership’s tax return. Please consult your tax advisor for more information on the possible inclusion of these fees on your tax return.

3.  Coordinate with Your CPA – Given the complexity of private placement taxation, a tax professional can help optimize your tax position, apply deductions, and navigate filing requirements.

4. Consider Filing an Extension – If you expect delays in receiving your K-1, filing for a tax extension (Form 4868) can provide extra time to gather and report accurate information.

For Accredited Investors in private placements, the K-1 form is an essential component of tax reporting. While it introduces complexity, it also unlocks potential tax benefits. By understanding how K-1s work and preparing accordingly, you can minimize tax surprises and ensure compliance with IRS rules.

If you have questions about your K-1 or private placement tax implications, consult your CPA or financial advisor to stay ahead of the curve.

This information is intended for reference only and does not constitute a recommendation or personal financial advice. Use of this information is at the user's discretion and risk.

Footnotes

1. Not all pre-IPO companies will go public or be acquired, and not all IPOs or acquisitions are or will become successful investments.