Filing Your Partnership Return - Basic Concepts
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Filing Your Partnership Return - Basic Concepts We get many questions from clubs that have
never used any accounting software as to how they should go about filing a
partnership return. A complete treatise on the subject would entail writing a
book, but here are some of the more salient points.
Federal Tax Form 1065, U.S. Partnership
Return of Income, is an information return. That is
to say no payment of tax is involved on the partnership level. The return serves
to alert the IRS and each partner as to what each member should be reporting on
his/her individual (1040)
return. For an investment club, typically, lines 1 through 22 on the
first page of the return are blank. The 'meat' of the information is
provided on Page 3 (Schedule K) and the K-1 Schedules for each partner. In our basic example, we will
contemplate a club that has dividend and interest income, capital gains, and
deductions related to portfolio income. We will also assume that one member left
the partnership during the year and realized a gain on doing
so.
If the club sold some securities during the year, Schedule D
(Capital Gains and Losses) should
be filled out before attempting to enter the data on Page 3 (Schedule K). If the stock that was sold
was held for more than one year, enter the pertinent data in Part II. If, on the
other hand, the holding period was less than one year, enter the data in Part I.
Read the instructions for Schedule D and bring the totals down to Lines 5 and/or
12. We will assume there was a long-term gain, and it amounted to $800 being
entered on line 12 of the Schedule D.
Now we are ready to tackle Page 3 (Schedule K). Enter the total interest
income for the club on line 4a. Enter dividend income on 4b. Enter our $800
long-term capital gain on line 4e(2). Do not enter anything in the section where
it says 28% gain.
Let's assume that the club had $320 of expenses, primarily
copying charges. This amount should be entered on Line 10.
On Line 14a you should enter the total of items 4a, 4b, 4c,
and 4f. On line 14b you should enter the amount on line 10.
On line 22, enter the amount of cash paid out to the departing
partner.
Schedule K is now complete. You should attach a schedule in
support of the expense items on line 10. This schedule, in our case, could just
say Copying Charges,
etc. 320.
To fill out each partner's K-1, it is only necessary to
determine his/her applicable share of each item on the Schedule K. You will note
that the line numbers on Schedule K-1 match exactly the line numbers on Schedule
K. Determining each partner's share could be slightly involved. We recommend
unit-based accounting, which lets you have partners with unequal positions of
ownership. We will assume in this case that the club had 10 equal partners. We
still have to face up to the problem that one partner left during the year. You
could allocate each item on Schedule K to the partners in accordance with their
ownership at the time the event happened. In other words, if a dividend came in
on December 15th and the partner left in July, that partner would not be
allocated any portion of the December dividend. Another way to compute it is to
allocate the departing member his/her share of all income/expense items
depending on how many months that member was in the club. For instance, if the
member left on June 30, you would say that this member should be allocated
1/10th of 1/2 of each item on Schedule K (or
1/20th). Subtract that number from each item, and
allocate 1/9th of the result to the remaining partners.
I'm going to take the easy way out and assume that the partner
left on December 31, thus making him a 1/10th partner for the entire year. In
that case, with the exception of Line 22, enter 1/10th of the Schedule K amount
on the appropriate line on the each partner's K-1. On line 22 for the departing
member, enter the total of the amount on line 22 of Schedule K.
There, you have it. That takes care of Form 1065 (after you sign it, and answer all questions, of course).
There is one matter remaining. The departing member
will have to report the gain on leaving the partnership on his/her Schedule D of
the 1040. This partner has enough information to reflect the transaction, but
most treasurers would supply the necessary data. On the individual's Schedule D,
the sales amount would be the proceeds received. The cost amount would be the
total amount paid in, plus or minus any Schedule K-1 items allocated during the
period that person was a partner. The gain would be long-term or short-term
depending on the length of time he/she was a partner.
This may seem a bit overwhelming, but if you follow the steps
exactly, you should have a return that complies with IRS rules and regulations.
This entire discussion should point out the benefits of software that will do
all these burdensome tasks for you.
As always, if there are further questions, or I have been
particularly unclear, please come back.
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