Running Smoothly

STEP 6  The I.R.S.

Income Tax has made more liars out of the American people than golf.
-- Anonymous for Obvious Reasons
(It wasn’t me.)

I don’t know why I assigned myself the "Taxes and Your Club" article. I do not like them. I do not understand them. I’d rather eat green eggs and ham.

I have been audited more than once. The IRS has come to my mother’s door looking for me. I have to file a return in nine different states and two countries. Talking about taxes makes me cry. Filing a tax return was almost reason enough for me NOT to start an investment club. It would save me a headache.

But wait… it ain’t that hard!! Once it is explained simply, you can even file it on your own without shedding a tear. I will explain as simply as I can how to file a return for your club, and then you can decide if there is throbbing behind your eyes that requires a Tylenol.

First, if you have followed all of the other instructions in Starting a Club and Running a Club, your club is a partnership and not a corporation. The corporation filing of a tax return is different from the partnership and much more complicated. It would make you cry. But partnership returns are the easiest of all returns. All you need are these three Federal Forms: the 1065, the Schedule D and the K-1.

1065

The first tax form that your club will need is the 1065. To keep things simple for everyone, have your calendar year be from January to December, and then the due date for the tax return will be April 15th. (Who can forget that?) The forms are available to download at www.irs.gov. (You can also get them at the post office or your local H & R Block.) The 1065 tells the IRS that your investment club was "doing business" during the year and exactly what you did. Did you buy and sell stock? If yes, what? And for what cost? Here is briefly what you need to know to fill out this form:

Page 1

Box A – Principle Business Activity – Investing

Box B – Principle Product or Service – Stocks

Box C – Business Code – Investment Clubs are 523900

Box D – Your EIN number

Box E – Date your club started

Box F – More than likely you will leave blank. If you answer yes to the following questions, leave it blank.

1. The partnership’s total tax receipts for the total year were less than $250,000.
2. The partnership’s total assets at the end of the year were less than $600,000.
3. Schedule K-1’s are filed and furnished to the partners on or before due date.

Box G – Check applicable boxes.

Box H – Most investment clubs check CASH

Box I – Put in number of K-1’s you filled out. (One for each partner.)

Page 2

----- Schedule B -----

Question 1 – Check General Partnership

Questions 2-11 – All answers should be no except for number 5. This should be NO, unless your club really struck it rich and are worth more than $600,000.

Page 3

----- Schedule K -----

You will need to know what your club’s interest on your money market account was during the year, what dividends you were paid during the year, and if you had a gain or a loss on a stock sale. These are reported after questions 4a, 4b, 4d and 4e. The tricky part is that you will have to know if it was a long-term gain or a short-term gain. (A long-term gain is from a stock that you have held over a year, and a short-term gain is from a stock that you have held under a year.)

Questions 8-11 – This is where you would fill in if your club has made any donations, or has had expenses that were club related (mailings, investment club software etc.)

Page 4

----- Analysis of Net Income -----

Line 1 – Enter the sum of Income (Loss)

Line 2 – Classify all General Partners as Active and enter your total from Line 1.

----- Schedule L, M-1, and M-2 -----

If you had already answered "No" to question five on page two, then leave the rest of this form blank.

That’s it for the 1065 – a very basic run-down. If you do have partners coming and going faster than you can say, "Calgon take me away!" then I’d advise seeing a tax specialist, even if only for the first year until you get the hang of it. Oh, and don’t forget to sign and date (speaking from experience).

Schedule D

The 1065 - Schedule D is to be filled out if your club has sold any stock during the past year. It needs to be reported. Uncle Sammy needs to know everything you’re up to, even if it was $22.15. Again, go to www.irs.gov and type in Schedule D and you will be able to download it. This form is very simple; Part 1 for stocks that you have held less than a year, and Part 2 for stocks held for more than a year. You need to fill in exactly how many shares of what stock you owned, what you bought it for, and what you sold it for.

Schedule K-1

The K-1 is an extension of the 1065 in that you need to fill out one form for each partner in the club. You need to divide the clubs profits or losses equally among the number of partners, then fill out the form saying just what that amounts to.

Box A – Check General Partner

Box B – Write Individual or "I"

Box C – Check Domestic

Box D – what percent is each member of the club as a whole? (4 members would be 25%, 5 members 20% etc…)

Box E – Where your partnership return is filed, the closest IRS Center. Check this out at www.irs.gov also.

Skip boxes F-J

4a, 4b, 4d, and 4e – These coincide with the numbers on page 3 of the 1065. Just divide those numbers by the number of members in your club and fill it out on each individual K-1. For example, if you wrote "$90" on line 4a of the 1065 and you had 3 people in your investment club, then you should enter "$30" (90/3=$30) on line 4a of the K-1 form. This is for one of your three members in the club.

The purpose of the K-1 is to divide the profits and the losses up equally amongst all of the partners. Members of your club would appreciate it if you could get them their K-1 as early in the year as possible so they can file it along with their personal income tax return.

That’s it! Three forms in less than three hours, once a year. There is no need to fret or lie about these tax returns. They’re so simple. Now if someone could just keep Chick Julie from stretching the truth about her golf game, I’d be happy. (I doubt she’ll read this far.)