In Focus

Income Tax for Partnerships

Yes, it’s tax time again. For those of you who are getting your numbers together and perhaps doing your own tax return for your investment club for 2007, I’m here to help you.

Every investment club must file a tax return. That is the way you let the IRS know how much money you have made during the past year. The investment club does not pay any tax on it’s own. It tells the government how much money it has made (or lost) during the year and then divides up that income and assigns it proportionately to each of the members of the club. The form that is sent in to the IRS is the 1065 and the form given to each member is a K-1. All of the K-1s are attached to the 1065, too, so the IRS expects to see the assigned income on each of the members individual tax return. Got it?

Two Types of Income

Basically, an investment club has two types of income. Interest and dividends is one. You receive interest on your money as it sits in a savings account waiting to use for a stock buy. This income is reported on Schedule K of the 1065. Then, you receive monthly, quarterly, or yearly dividends on stock that you own. This is reported also on Schedule K.

The other income that investment clubs have is gain or loss on stock sold during the year. This income is reported on Sch D of the 1065. Be sure you use the 1065 Sch. D and not the individual Sch. D. The totals from this Sch. D will transfer to the 1065 Sch. K also.

Each Member Should File a K-1

Then the total income from the 1065 will be divided up between the members and listed on individual K-1s. Be sure you send each of the members a copy of their K-1s so they can include that income (or loss) on their own individual tax return. Perhaps it would be a good idea to let each member know that they will be receiving this so they don’t file their own 1040 before you get it to them. If they have already sent their own 1040 into the IRS they would have to amend it if they got their K-1 later. But work on it earl so you can get it to members early. Today is January 23rd and I am preparing ours today!

And most states require you to file a state partnership also. Check with your state department of revenue and they will send you the forms needed.

So, that’s it! After reading this, if you still have specific questions, just post a question to me (Chick Jeanette) on the Ask the Chicks message board and I'll try to answer you as soon as I can. Or re-read Chapter 18, page 238 in our fearless leaders book, Chicks Laying Nest Eggs for answers to your questions

It’s really a piece of cake -- or should I say “chicken feed”?