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#1 Posted : Friday, April 6, 2018 6:05:01 PM(UTC)

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This past week I helped several clubs make the accounting entries to account for their club's investment in publicly traded partnerships. This prompted me to think maybe now is a good time to remind clubs of some investments that pose a challenge to clubs holding them in their portfolio.
Here are some investments that pose challenges to clubs that we recommend clubs not hold in their portfolios. These securities may be excellent investments but add extra work and can delay filing club tax returns.
Publicly Traded Partnerships (PTP) - As pass through entities partnerships pass-through their income to their partners. The partners declare their share of the partnership income as personal income. The partnership informs its partners of their share of income using the K-1. The problem for clubs owning a PTP is the K-1 is not received in time to file a club tax return by the club's filing deadline. This is because the deadline for a partnership to send out a K-1 is the same day as the club's tax return filing deadline. While some PTPs are good about getting K-1s out before March 15 and even make the form available online, there is no guarantee a club will receive their K-1 before the club's deadline to file its tax return. A club owning a PTP will often need to request an extension to file their return while they wait to receive their K-1 from the PTP.
Tax filing delays are not the only issue for clubs owning a PTP. Cost basis is treated differently for a PTP than it is for a stock and "dividends" paid during the year are really partnership distributions which affect cost basis. With some extra work these differences can be dealt with in the accounting software.
Real Estate Investment Trusts (REITs) - REITs pose different problems and the accounting software has some features to help. The main accounting issue for REITs is the cash distributions received during the year. While usually classified as dividends when received, they are in fact a combination of multiple types of distributions. Each distribution can be a combination of dividends, return of capital, and long-term or short-term capital gains. In addition the capital gains may be a special type, section 1250 gains, which must be accounted for separately. The problem for clubs is the actual nature of these distributions is not known until the end of the fiscal year. This then requires the treasurer to edit the original entries to conform to the new information. The annual allocation process makes it easier to deal with some other issues related to owning REITs but still requires a bit more work by the treasurer.
Commodity ETFs - Owning an ETF that holds precious metals also create problems for clubs. Gold and other precious metals are considered collectibles and the capital gains rate for collectibles is different than that for securities. Owners of such ETFs are considered to own a prorated share of the ETFs holdings. Besides the collectibles gain issue these investments also sell some of their holdings to pay expenses. Such sales pass through to the ETF owners who for tax purposes are considered to have sold some of their share of the gold or other holding to pay for the expense. These expense sales are difficult to enter into the accounting software.
While these securities may be good investments they may be better suited to personal portfolios rather than a club's due to the added work for the treasurer and/or possible delays in filing a club's tax return.

Russell Malley

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