For many investment clubs (and particularly for treasurers or financial partners), preparing the club’s tax filings is a stressful task. But it doesn’t need to be! ICLUBcentral and BetterInvesting provide all the tools and assistance you need to generate accurate investment club tax returns for the Internal Revenue Service and state agencies.
As with many complex processes, there are many ways in which treasurers and members alike can get tripped up when preparing an investment club’s required filings. Here are the 10 things you absolutely must know about investment club tax returns.
1. Investment clubs don’t pay federal taxes. But that doesn’t mean their activities are tax-free. General partnerships are known as “pass-through entities” with respect to tax law. This means all tax liability passes through the partnership to the individual partners, who must in turn pay applicable taxes.
2. There are no exceptions: All investment clubs must file an information return each year with the IRS, and in many states as well. It doesn’t matter whether they didn’t have income, expenses, investments or any other activity during the year — clubs must file Form 1065 by April 15. More than a decade ago, it was common for investment clubs to seek an exemption from the rules regarding partnership filing, but it turned out that clubs that did so had received bad advice. Even though clubs don’t pay federal or state taxes directly, they still must let the IRS know about all of their financial transactions on Form 1065 and related schedules.
3. Investment clubs with members who live in different states may need to file returns in more than one state. Some states require tax filings from any partnership that has even one partner who resides in that state, regardless of where the partnership is domiciled. If your club has members from more than one state, contact each state to determine its requirements for tax filings from investment partnerships.
4. According to the IRS, a partnership must provide a Schedule K-1 to each partner by April 15 detailing the partner’s share of income, expenses, gains and other transactions. That’s not a typographical error — the April 15 deadline is the same as the filing deadline for individuals! The assumption is that partnerships may need the extra time to gather the required information for their tax filings and that the partners will file for extensions to complete their personal returns. Any club treasurer who waited until April 15 to distribute tax information to members would probably be unfriended pretty quickly on Facebook.
Still, most investment clubs probably won’t be able to provide members with tax documents much earlier than late in February. Brokerage firms and other financial institutions now have until Feb. 15 to send Form 1099s to customers, and it’s vital that the information clubs report to the IRS is the same as the details sent by their banks and brokerages — and you can’t do that until the 1099 forms arrive online or in the mail.
Even if your brokerage firm provides you with a year-end statement early in January, you should still await the 1099 to see whether the information is the same. For some club members, this may be an inconvenience, or worse. Individuals who like to file their personal tax returns early in the year are probably not going to be happy with delaying their filing for two months. Worse, farmers who must file early may have to make estimated tax payments and file for an extension to the filing deadline.
5. Although the tax return for an investment club can be prepared by hand based on the reports and other information included in the club’s books at myICLUB.com
or in Club Accounting 3, the task is time-consuming and tedious. Worse, Form 1065 is used for all kinds of partnerships, not only investment partnerships, so the largest part of the form isn’t applicable to investment clubs! Trying to decipher the Form 1065 instructions to figure out which items are relevant to your club is a thankless job. This is where ICLUBcentral’s 20 years of experience with investment club accounting comes in handy in creating Club Tax Printer software.
6. Tax returns for investment partnerships are so uncommon that even professional accountants and tax preparers may not be familiar with how to complete the forms. We occasionally hear from clubs that have paid hundreds of dollars to tax professionals to complete their club tax returns or review a club’s past returns prepared using ICLUBcentral software, and these pros express an opinion that the forms are incomplete. We politely but firmly demonstrate how all the blank lines on the Form 1065 are inapplicable to investment partnerships. Although there are certainly times when the assistance of a qualified tax professional may be required by your club, the preparation of a standard investment club tax return isn’t one of them.
7. Some securities are simply not suitable for investment clubs, largely because of the headaches they cause at tax time for the treasurer. Among these are gold or commodity exchange-traded funds, real estate investment trusts (REITs) and any security with “partnership” in its name. These all require workarounds and additional steps to properly report the tax liabilities associated with these securities. Club members who insist on holding these securities should be elected to the treasurer post immediately so that they can learn for themselves how the frustrations outweigh the benefits of owning them.
8. Going paperless can streamline a club’s operations, and this is no more so than at tax time. Many brokerage firms now provide 1099s electronically, downloaded from the institutions’ websites. But did you know that a club’s treasurer doesn’t need to print paper copies of the Schedule K-1 for members? Members of clubs that use myICLUB.com can simply log on to the site, click the Taxes tab, and download and print their personalized tax forms. Members can’t print other members’ forms — only those members with treasurer privileges can access the entire membership’s forms. Club members eager to file as early as possible should be directed to their club website instead of waiting for the next meeting where paper copies would otherwise be distributed. This makes the treasurer’s job much easier.
9. Help is available during tax season from ICLUBcentral’s staff online or via telephone. Because we typically receive many more calls during tax season, we strongly suggest that folks use our online help system at www.iclub.com/support/
and our team will respond as quickly as possible. Our homepage at www.iclub.com
also provides regular updates on the status of forms, so we ask that you check there regularly before calling or writing.
10. Relax! Tax season comes but once a year. And as long as investment clubs don’t invest in esoteric or problem securities and members are educated and reasonable with their expectations about when they’ll receive their personal forms, there’s nothing so terrifying about the process of preparing a club’s tax returns.
Thousands of investment clubs successfully send off their forms to the IRS each year with no problems, and your club will, too.