>My club purchases tax printer each year for help with federal taxes. However, I live in Alabama and no state printer is available. I have been paying my personal accountant each year to take our freshly completed federal tax forms and generate state forms. I feel I am having to pay double to get taxes done. Any instructions for generating state forms from federal forms?

I feel your pain. We didn't have anything here in New Jersey either... until this year. I don't have any quick advice since I haven't looked at the AL partnership return, but it might not be all that difficult to transfer the relevant data from the federal return to the AL return. I'll try to take a look at it next week and reply back here.

Ira Smilovitz

Rumors that I had entered the Federal Witness Protection Program were premature. Suffice to say that the computer problems that I thought I had fixed last week came back again. I won't make any promises today, but we only have one more workshop session after this one,

- Ira

Closing the Books - Part 2

In the last session, we reconciled the cash accounts and security holdings and began the reconciliation of income and expense by analyzing the different income items associated with the club's operations for the year and how they are reported at year-end via the various reports available in the accounting software.

Let's continue now with the expenses, deductions, and credits. With the exception of taxes withheld (either foreign or backup withholding), none of these will be reported directly to the IRS by a third party, so the issue for you as club treasurer is to confirm that the software entries match the actual use of funds.

Deductible Operating Expenses

Most routine expenses of running an investment club are deductible as ordinary business expenses. These deductible expenses include such items as software, tax prep, BI dues, room rental, printing, photocopying, postage, bank charges, etc. Some other deductible expenses (charitable contributions, investment interest expense, taxes, etc.) receive special treatment and need to be reported separately on the club's tax return (see relevant sections below).  And certain expenses such as meals and entertainment are not deductible as business expenses for tax purposes, but they reduce your members' ownership value in the club. (See Non-Deductible Expenses below).

There is another wrinkle to consider when reviewing your expense entries -- allocation method. Back in the second session, when we discussed allocation methods, I stated that my personal preference was proportional allocation for all expenses, but that some clubs preferred equal allocation for some or all of their expenses.

You can review your expense entries on the transaction summary/history report for the year to confirm that they are assigned correctly. CA3 and CAO only give you the option of deductible or nondeductible and you need to use the comment field to identify the expense. Bivio allows you to categorize the expenses directly.

Both CA3 and bivio provide reports (Club Expenses and Income and Expense History respectively) that make it easy to review your expenses for the year. Otherwise, you can use the transaction summary report in all three programs. Only bivio's Transaction History report identifies equally allocated expenses as such. In CA3 and CAO you will have to review each transaction's entry in the database.

Charitable Contributions

Charitable contributions should be identified as such in the transaction summary/history report. They are also listed separately on the allocation reports. If your club had any charitable contributions, make sure that you've allocated them in accordance with your club's Partnership Agreement/decision.

Investment Interest Expense (Margin Interest)

Most clubs do not incur margin interest as the model BI investment club Partnership Agreement includes a prohibition on incurring debt in the club's name. However, some clubs do use margin, Margin interest should be separately identified because it receives special treatment on your club members' individual tax returns. In bivio, margin interest can be identified as such when you enter the expense and it will be identified on the transaction report and reported separately on the allocation report. If your club uses CA3 or CAO, there is a special workaround for margin interest. Contact customer support for the details.

Foreign Taxes

Foreign taxes are reported to the club on Form 1099-DIV/1099-INT in box 6. Compare this amount to the amount shown in the Cash and Reinvested Dividends (Distributions) section of the transaction report. The total foreign tax paid is also reported separately in the allocation reports.

Backup Withholding

Most clubs will not experience backup withholding. If your club does, it is probably the result of your bank/broker not having the club's correct EIN. Backup withholding is reported on Form 1099-DIV/1099-INT in box 4. Backup withholding can be applied as a direct credit against your club members' personal income tax liability (similar to W-2 withholding). In bivio, backup withholding can be identified as such when you enter the expense and it will be identified on the transaction report and reported separately on the allocation report. If your club uses CA3 or CAO, there is a special workaround for backup withholding. Contact customer support for the details.

Non-Deductible Expenses

Non-deductible expenses are listed separately on the transaction reports. Check to make sure you've correctly identified the non-deductible expenses. Bivio allows you to categorize the non-deductible expense more finely than CA3 or CAO.

Final Reports

At long last, we've finished reviewing our club's records and are ready to officially close the books. In CA3 and CAO, this means redoing the Allocation process if any changes were made during the review process.

            CA3:            Tools>Allocate Income and Expenses. Select 2006.

            CAO:            Accounting>Utilities>Allocate Income and Expenses. Select 2006.

In bivio, the allocation process is continuous and doesn't require any direct action from the treasurer.

Now print the official reports for the club's permanent files and its members. I believe in overkill here and so I print just about everything.

Club Reports

            CA3:     Valuation Statement (12/31)

Member Status Report (12/31)

Transactions Summary (1/1 - 12/31)

Club Capital Gains (1/1 - 12/31)

Allocation of Income and Expense Statement

Individual Valuation Units Ledger (1/1 – 12/31) (all members)

Cash Journal Listing (1/1 – 12/31)

Complete Journal/Ledger (1/1 – 12/31)

Income/Expense and Balance Sheet (12/31)

Member Deposit Report (1/1 - 12/31)

Withdrawal Distribution Reports for all members who took a withdrawal during the year

            CAO:    Valuation Statement (12/31)

Complete Journal/Ledger (1/1 – 12/31)

Individual Valuation Units Ledger (1/1 – 12/31) (all members)

Cash Journal Listing (1/1 – 12/31)

Member Status Report (12/31)

Transaction Summary (1/1 - 12/31)

Cash Contributions (1/1/-12/31)

Capital Gains (1/1 - 12/31)

Allocation of Income and Expense Statement (2006)

Income/Expense Statement and Balance Sheet (2006)

Withdrawal Distribution Reports for all members who took a withdrawal during the year

            bivio:     Valuation (NAV) (12/31)

Investment Performance (12/31)

Member Status (12/31)

Member Performance (12/31)

Transaction History (1/1 - 12/31)

Balance Sheet (2006)

Income Statement (2006)

Transaction Ledger (2006)

Member Tax Allocations (2006)

Capital Gains and Losses (2006)

Income and Expense History (2006)

Member Contributions and Withdrawals (2006)

Withdrawal Reports for all members who took a withdrawal during the year

Member Reports

Copies of the following reports are given to each member:

            CA3:     Valuation Statement (12/31)

Allocation of Income and Expense

Member Status Report (12/31)

Income/Expense and Balance Sheet (12/31)

Individual Valuation Units Ledger (1/1 – 12/31) for that member

Withdrawal Distribution Report to each member who took a withdrawal during the year

CAO:    Valuation Statement (12/31)

Allocation of Income and Expense

Member Status Report (12/31)

Income/Expense and Balance Sheet (12/31)

Individual Valuation Units Ledger (1/1 – 12/31) for that member

Withdrawal Distribution Report to each member who took a withdrawal during the year

            bivio:     Valuation (NAV) (12/31)

Member Status (12/31)

Balance Sheet (2006)

Income Statement (2006)

Member Tax Allocations (2006)

Investment Performance (12/31)

Member Performance (12/31)

Withdrawal Report to each member who took a withdrawal during the year

In the final session of this workshop, we'll see how the club's tax return is completed from the various reports and tax reporting documents.

>Please disregard my question of what DRP stands for--found it in glossary of Club Accounting handbook.

I love it when people ask questions and then are able to find their own answers. Too many people are afraid/embarrassed to ask questions in the first place. The accepted lore is that for every question there are 10 more people who wanted to ask the question but didn't. Then when people can find their own answers it builds confidence and enhances the retention of knowledge.

Keep on asking and don't worry. If you can't find your own answer, there should be someone around who can provide one.

Ira Smilovitz

Taxes

We're coming down the homestretch. Let's look at how the club's tax return is prepared. We won't go through every item on the return; rather, we'll focus on how the numbers transfer from the reports to Schedules K and K-1. Then we'll review briefly some of the peculiarities associated with the tax modules provided for the accounting software.

From Allocation to 1065

The following table shows how the numbers flow from the allocation report to the tax return on Schedules K and K-1. Club totals are reported on Schedule K. Each member's share of the club totals is shown on the respective K-1.

Tax Preparation Using Accounting-Vendor Software

The following sections do not walk you through the entire tax return preparation process, but only cover certain items that require additional data input from your year-end reports or tax reporting documents.

CA3/CAO

You begin the tax preparation process by clicking on Taxes>2006 Tax Printer. If your club owns any REITs, mutual funds, or "other" securities and you have correctly identified them in the security profile (see session 3 of this workshop), you should eventually get to a screen that asks for the amount of qualifying dividends (REIT, mutual fund, "other") from Form 1099-DIV, box 1b and Unrecaptured Section 1250 Gain (REIT) from Form 1099-DIV, box 2b. (Note: If your club owns any of these in a brokerage account with other securities, you may have to calculate manually the amount of qualifying dividend which is associated with each investment.)

bivio

You begin the tax preparation process by clicking on Accounting>Taxes. Along the way, you will be asked to choose between Time Based and Snapshot allocation (see session 2). Next you will be asked to identify those investments (REITs, mutual funds, etc.) that do not pay dividends that are 100% qualifying. As best I can tell, if you have a REIT or mutual fund whose dividends are not 100% qualifying, you have a two step process. You need to go back to the Accounting section and edit each of the distribution transactions to identify the part of each distribution that is qualifying (if any) before indicating in the tax interview that the security pays nonqualifying dividends. Finally, you then get a chance to review and correct the ex-dividend dates for each of the distributions received in 2006.

Once you've completed the tax interview for any of the tax software, you should print a full copy of Form 1065, Schedule D (if you had any capital gains/losses), all Schedules K-1, and all supporting statements to file with the IRS. You should print a second complete copy for the club's permanent records. Finally, you should provide each member (current and withdrawn) with a copy of his/her Schedule K-1.

Congratulations!! You're done for another year.

Thank you for taking the time to stick with me as this took a bit longer than expected. I'll see you on the boards here, at bivio's club_cafe, or over at BI's club-treasurers.

Ira Smilovitz

>>Ira:

>>Wow! That last segment seems too easy. Last year, my club had just started to use CAO.
We purchased the appropriate state and federal tax programs. And, like you say here, answered the questions and went on our merry way.
After reading all you have to say about running this report and that, I'm scared! Did we do it correctly last year?
Shall I go back to check?

You're welcome to go back and check, but I wouldn't worry too much about that which is past. What I wrote about running this report and that is meant to cover the situation where things are messed up and you're trying to find out what went wrong and correct it. The better the job you do during the year of making sure your entries are correct, the less you have to do at the end of the year. For the two clubs that I do the books for, I expect to spend no more than one half hour each, printing and reviewing the reports and generating the federal tax returns (not counting the time to photocopy and assemble the finished return). FWIW, one is a CA3 club and the other is a bivio club. The state return(s) will take me longer as I do those manually. 

On the other hand, I've spent days (literally) working with some clubs to untangle their records. 

  
>>And, anyway, how long will this information be available here before it gets sent to the archives?
I have a difficult enough time finding this site.

I don't know the answer to that. Perhaps one of our hosts can enlighten us.

Ira Smilovitz

Ira,

  Thanks so much for a great presentation on "closing the books".  I especially like the grid showing where the information from the Allocation of Income and Expenses needs to be written on the Schedule K and the K-1.  That is so helpful and easy to follow.  Is there any place where we can find the general instructions for filling out the remaining portions of the 1065?  I noticed on the BetterInvesting web site that the instructions  are for 2005.  Can we still use those?  Do you know if there have been any changes for this tax year?

Thanks so much for all the help you give us.

Candace Baker

Ira,

  I was just preparing a draft of the 1065 Schedule K and K-1s for my club and comparing the results to forms I submitted last year.  I noticed that last year entries were made on the Schedule K lines 20a (Investment Income) and 20b(Investment Expenses) and that IClub's article on "Where the Form 1065 entries come from in Club Accounting" also lists entires for lines 20a and 20b.  You have not included these entries this year.  Do we not need to fill in 20a & 20b this year?

Thanks for your help,

Candace Baker

>>Thanks so much for all the help you give us.

You're welcome. There aren't many changes for 2006. I believe most of the changes that could affect investment clubs have to do with code letter changes for Schedule K-1 entries. I was just asked to review the 2006 BI instructions this past week, so I assume that they will be posted shortly.

Ira Smilovitz

>> I was just preparing a draft of the 1065 Schedule K and K-1s for my club and comparing the results to forms I submitted last year.  I noticed that last year entries were made on the Schedule K lines 20a (Investment Income) and 20b(Investment Expenses) and that IClub's article on "Where the Form 1065 entries come from in Club Accounting" also lists entires for lines 20a and 20b.  You have not included these entries this year.  Do we not need to fill in 20a & 20b this year?

Yes, you do. I stated in the workshop session that I wasn't providing a full guide to completing the 1065. There are additional data and calculations that you need in order to complete the return. If you follow the official (or BI) instructions, you will find how to complete Schedule K, lines 20a and 20b and the corresponding lines on Schedule K-1. 

Ira Smilovitz

Ira,

  Great.  I'll keep checking the web site for the updated instructions.

Thanks,

Candace

We have formatted this great workshop for printing and distribution as a .pdf.  It can be downloaded (and rated!) from our Learning Library.