A K-1 arrives in September

Why does a Schedule K-1 arrive so late

Because the partnership has to finish its own return first. A fund prepares its return and issues K-1s from it, and a fund that invests through other partnerships waits for their K-1s before it can complete its own. A K-1 in September is routine.

A partnership files Form 1065 (opens the official IRS page in a new tab) and gives each partner a Schedule K-1 showing that partner's share of income, gains, deductions and credits. The partner's instructions for Schedule K-1 (opens the official IRS page in a new tab) state that a partner may be liable for tax on that share whether or not anything is distributed. The K-1 is often the only document that says how much.

The same instructions tell partners not to change items on their copy of the K-1. A partner who thinks an item is wrong should ask the partnership for a corrected schedule. A partner who reports an item differently from the partnership's return must generally attach Form 8082, a notice of inconsistent treatment, and failing to do so can bring an accuracy-related penalty.

How far can the US return be extended for a late K-1

To 15 October, and occasionally later. A US citizen living outside the US on the regular due date has an automatic two-month extension to 15 June. Filing Form 4868 by that date adds four more months. Neither extends the time to pay, so interest runs from 15 April on any unpaid balance.

The automatic two-month extension (opens the official IRS page in a new tab) applies where the taxpayer lives outside the US and Puerto Rico and has a main place of business or post of duty outside them, and a statement saying so is attached to the return. Publication 54 (opens the official IRS page in a new tab) also describes a discretionary further extension to 15 December for taxpayers out of the country, requested by letter to the IRS by 15 October. It is discretionary.

Because the extension covers filing only, the April payment is the one that matters. An investor who expects a K-1 late in the year should estimate the fund's allocation from its quarterly reports and any tax estimate the manager will give, and pay by 15 April. Our page on Form 4868 explains the request, and our post on US and UK tax deadlines in one calendar sets the dates side by side.

• 15 April: original due date, and the date from which interest runs
• 15 June: automatic extension for a US citizen living abroad
• 15 October: extended due date with Form 4868 filed in time
• 15 December: discretionary extension, by letter, not guaranteed

Should you file on an estimated K-1 and amend later

Sometimes, but it is usually the second-best route. Filing on time with estimated figures and amending once the final K-1 arrives means two federal returns, possibly two sets of state returns and often a revised Form 1116. Extending and filing once is generally cleaner where the K-1 will arrive before the extended date.

Filing early on estimates suits a few cases: someone who needs a filed return for a mortgage or immigration application, or whose K-1 is not expected before 15 October. The estimate should be the best figure available, and the return should be corrected once the final K-1 arrives. A refund claim on Form 1040-X (opens the official IRS page in a new tab) must generally be made within three years from filing or two years from payment, whichever is later.

Amended K-1s are a separate problem. A fund can issue a corrected K-1 after the investor has filed. Each one means checking whether the US return, any state returns and the UK return all need correcting. Our page on Form 1040-X covers the US amendment, and we prepare it alongside the original through our individual tax returns service.

What does Schedule K-3 add for a US citizen in the UK

The international detail the K-1 leaves out. Schedule K-3 reports items of international tax relevance, including the source and category of income and the foreign taxes paid. The K-1 instructions say the foreign tax figure in box 21 should not be used to complete Form 1116, and direct the partner to Schedule K-3 instead.

That matters because the foreign tax credit (opens the official IRS page in a new tab) is limited by category and by source. A US citizen resident in the UK pays UK tax on the fund income, and the US credits that tax only against US tax on foreign-source income in the same category. Much of what a US fund earns from US companies is US-source. Our post on re-sourcing US dividends under Article 24 explains how the treaty can treat such income as arising in the UK for a citizen resident there, to the extent needed to avoid double taxation.

Not every partnership sends a K-3 automatically. IRS guidance lets a partnership that meets set conditions, including that its direct partners are US citizens, resident aliens or certain domestic entities, skip the schedules, provided it tells partners they will not receive a K-3 unless they ask. A request made after a cut-off one month before the partnership files still produces one, but it can arrive later than the K-1.

• Ask the fund in writing for a Schedule K-3 early in the year
• Check whether the request covers later years or must be repeated
• Use the K-3, not box 21 of the K-1, for Form 1116
• Keep the K-3 with the UK papers, since it shows the source of each item

Which other US forms can a fund investment bring

Mainly Form 8621 for passive foreign investment companies and Form 8865 for foreign partnerships. A US fund that holds non-US funds generally deals with PFIC reporting at fund level, while a direct investment in a partnership formed outside the US can put a filing on the investor personally.

The Instructions for Form 8621 (opens the official IRS page in a new tab) treat a US partnership that owns PFIC stock as a shareholder that files the form, and a qualified electing fund election made by a domestic partnership is made at the partnership level, with partners taking the income into account through their K-1s. A partner must file personally where the partnership fails to file, or where the partner has to recognise income under the excess distribution rules of section 1291.

Where the investor holds a non-US partnership directly, such as a Cayman or English limited partnership feeder, there may be no K-1 from a US return, and Form 8865 may be due on the investor's own facts. Our PFIC reporting service reviews fund documents for both forms. Some US states also tax non-resident partners on income sourced there, which our multi-state tax filing service checks fund by fund.

How does the UK tax income from a US fund partnership

Generally as the partner's own share of the fund's income and gains, as they arise. HMRC's general view is that a US limited partnership is transparent, so a UK resident partner is taxed on the share of profits as they arise rather than on distributions. The UK computes that share under its own rules, by UK tax year.

HMRC's International Manual lists US general partnerships, limited partnerships, limited liability partnerships and limited liability limited partnerships as transparent, and US LLCs as opaque. The list is a general view, and HMRC says its view of a particular entity can vary with its documents and the provision concerned. A fund organised as an LLC, or investing through one, can therefore produce a different UK answer, as our post on the British owner of a Delaware LLC explains.

Income from abroad is reported on the foreign pages (SA106) (opens the official HMRC page in a new tab), with partnership pages where the share of a partnership's profits has to be returned, and relief for US tax is claimed as foreign tax credit relief under the rules for tax on foreign income (opens the official GOV.UK page in a new tab). Our UK Self Assessment service prepares the SA100 with the US return in view.

• US limited partnership: generally transparent, taxed on the share as it arises
• US LLC: generally opaque, so the UK charge usually follows distributions
• Each fund's documents can change the answer for that entity
• Income goes on the foreign pages, with partnership pages where needed

How do the US and UK credits line up across the years

Often imperfectly, which is why provisional figures, carryovers and the choice of credit year matter. A calendar-year fund's year straddles two UK tax years, and the earlier UK return is due before the K-1 exists. HMRC's notes allow a provisional figure, flagged on the return with an explanation, and corrected once the final figure is known.

HMRC expects the final figure to be sent without delay, and an unreasonable delay can bring a penalty where more tax is due. On the US side the foreign tax credit (opens the official IRS page in a new tab) matches UK tax to US income by year, category and source, and the UK tax on a fund year may be paid across two UK years.

Take a US citizen working as a hospital doctor in London, UK resident for many years, who invests as a limited partner in a Delaware buyout fund and a Delaware real estate fund. In April she has neither K-1, so she pays an estimate and relies on the extensions. Her UK return for the year ending in April, due by 31 January, carried a provisional figure for the early months of the fund year. The K-1s and K-3s arrive in September. She files the US return by 15 October, amends the UK return with final figures, and uses the same K-1s for the next UK return.

On her US return, the UK tax she can credit depends on whether she claims credits when paid or as they accrue, as our post on which year takes the UK tax credit explains. Unused credits can be carried back one year and forward ten within the same category. We work through both returns together under our cross-border treaty relief service, with the result on Form 1116. For the other ways fund and equity income crosses the two systems, return to the guide to US-UK tax for founders, fund managers and executives.