Treasurer's Year-End/Tax Workshop
February 21, 2004
Presented by
NAIC
Minneapolis/St. Paul Chapter
Instructor:
Bruce Reed
Agenda
- Welcome and Introductions
- Year End Duties
- Tax Information
- Verification of Club Books
- Frequently Asked Questions
- Resources
Welcome and Introductions
Treasurer’s Workshop
Bruce Reed
How many of you are club treasurers?
How many of you are doing club taxes this year?
How many of you doing club taxes for the first time?
Buddy system
This presentation is available at www.brucereed.com click on Investment Clubs.
Welcome and Introductions - Expectations
What do you expect to get out of this class?
What are your expectations for this class?
What questions do you want answered?
We will review these at the end of the presentation.
Welcome and Introductions - Assumptions/Limitations
This workshop assumes you are using either ICLub NCA2 or NOCA for accounting, and IClub Tax Printer or Online Tax Printer for federal forms.
This workshop does not cover manually filling out the tax forms, but this workshop will be useful for those who are.
This workshop does not cover REITs or clubs that have a security holding in other Partnerships.
Some information on these topics has been provided on the Club Treasurers email discussion list: lists.better-investing.org - click on Club Treasurers
Welcome and Introductions - Disclaimer
- Statements made in this workshop are not official statements from either NAIC or the IRS.
- We believe that our statements are accurate information but they are not intended to replace professional tax or accounting advisors.
- When in doubt follow the advice of your tax advisor or accountant who is familiar with your particular circumstances.
Certain portions of this presentation are subject to NAIC and I-Club copyright, but the presentation itself is copyrighted by Bruce Reed.
- Feel free to use all or part of this presentation for any Investment Club Treasurer activities
- Feel free to reuse all or part of this presentation in other presentations
- Do not feel free to laugh at or ridicule this presentation - we all have our limitations
Year End Duties
- Update Software
- Update Settings
- Enter all data
- Dividends
- Enter closing stock prices
- Verify Club Info
- Audit
- Distribute Earnings
Year End Duties - Update Software
Update your software to the latest version.
As of 2/20/04 - NCA is V2.5.11.
NOCA is updated by IClub.
Other software packages?
Manual methods - remember to get more paper!
Year End Duties - Update Settings
Update your Distribution settings
- Utilities, Distribution settings
- Allocation - time based vs. non-time based. IRS mandates time-based allocation. If you have already run distributions and need to change this setting for 2003, go ahead and change it and just re-run the distributions for the change to take effect.
- Accounting Methodology for year-end distributions. This should be set to 2003 or earlier. If it says 2002, don't change it. This applies to NOCA; it does not apply to NCA yet.
Year End Duties - Enter all data up to 12/31
- Member deposits
- Member fees
- Stock purchases/sales
- Automatic OCP purchases
- Stock Dividends
- Broker/Money Market Dividends
- Bank/Checking/Savings Dividends
- Expenses
Year End Duties - Dividends
Dividends from stocks and other securities should be entered under the Securities menu, not the Cash Accounts menu.
Money Market earnings are entered in the Cash Accounts section, entered as Dividends or Interest depending on how your broker labels them.
Credit Unions always label earnings as Dividends on monthly statements, but send a 1099-INT at the end of the year. These earnings are Interest, not Dividends. Enter them under the Cash Accounts section, just like bank Interest.
Wait for all 1099s before finalizing your year-end. Verify your amounts against the 1099s.
Enter ex-dividend dates. More information on ex-dividend dates is provided later in this presentation.
Year End Duties - Enter closing stock prices
- Create a year-end valuation and enter stock prices as of the last market closing of the year
- Use a 12/31 date regardless of the actual market closing. If you don't you won't be able to distribute earnings.
Year End Duties - Verify Club Info
Verify that the club's Tax ID Number is entered correctly into your software.
Verify that all partners have signed the current Partnership Agreement.
Year End Duties - Audit
In NCA, perform an audit to ensure that all Unit Value and number of unit calculations are correct.
This does not apply to NOCA.
Year End Duties - Distribute Earnings
When you have all data for the year entered, run the Distribute Earnings function under Accounting, Utilities. This will give you the Distribution of Earnings report.
Keep a copy of the Distribution of Earnings report for your club records.
Verify the totals against your 1099-DIV and 1099-INT statements.
Tax Filing
- Should Investment Clubs file tax returns?
- ID Numbers
- Federal forms
- State forms
- Methods for printing forms
Tax information available at www.iclub.com/taxes
Mailing via "Return Receipt Requested" is recommended.
Tax Filing - Should Investment Clubs file?
Yes, Yes, Yes
Clubs are Partnerships, according to the IRS.
Clubs have a Federal Tax ID number.
Clubs can be subject to severe penalties for not filing. All partnerships must file tax forms, even if there is nothing to report.
If you have further questions of filing requirements, talk to your tax accountant or CPA.
Tax Filing - ID Numbers
Federal EIN
IRS SS-4 form - www.irs.gov/pub/irs-fill/fss4.pdf
MN ID Number
To get a MN ID number, call 651-282-5225
Or download form www.taxes.state.mn.us/misc/forms/pdf/abr.pdf
No 800 phone number because of budget cuts
Have Federal EIN and Member names and SSN numbers ready
Tax Filing - Federal Forms
Federal Form 1065 and related schedules for the Club. Schedule K-1 for each member.
File by April 15
Print 3 copies of Form 1065
- One for IRS
- One for state filing
- One for club records
Print 4 copies of Schedule K-1
- One for IRS
- One for state filing
- One for club records
- One for members
Tax Filing - State Forms
www.iclub.com/support/state_tax_forms.asp (Note - 2/18/04 this page is still showing 2002 forms)
Another resource: www.taxadmin.org/fta/forms.ssi
MN, WI, IA require state filing
Minnesota - Form M-3
www.taxes.state.mn.us/taxes/partnership/index.shtml
File by April 15
This year IClub is providing a State Tax Printer for $59 for some states. www.iclub.com/taxes
Tax Filing - State Forms - Filling out the MN Form M-3
Investment club instructions
- Name, ID, and Address information
- Back side (Schedule A), enter zero on all lines under Column A
- Sign
- Attach Federal Form 1065 and Schedule K-1s
Tax Filing - Methods for printing forms
Download PDF files and print blank forms
Download PDF files and use PDF form fill-in
NAIC Club Accounting Tax Printer
- prints Form 1065
- prints Schedule K-1
- prints Schedule D, as needed
- prints some State forms
Verification of Club Books
- Pre-filing verification
- Reports to print
- Other documents
- Procedures
- NAIC Resources
Verification of Club Books - Pre-filing verification
Verification (audit) of the Club's records is not generally tied to the filing of the Club's tax returns.
However, many clubs may benefit from having some kind of verification by another member before closing the books for the year and filing tax returns.
Verification of Club Books - Reports to print
Print reports for January 1 thru December 31, or as-of December 31.
- Journal (Complete Journal/Ledger)
- Cash Journal
- Transaction Summary
- Individual Security Ledger
- Individual Valuation Unit Ledger
- Valuation Statement
- Distribution of Earnings Statement
- Income/Expense Statement and Balance Sheet
- Withdrawal reports (if there were any)
Verification of Club Books - Other documents
- Broker Monthly and Transaction statements
- Bank statements
- Deposit slips
- Canceled checks
- DRP/OCP statements
- 1099-DIV and 1099-INT statements
- 1099-B for stock sales
- Stock certificates held by the club
Include the last statements from the prior year for beginning balance verification.
Verification of Club Books - Procedures
- Check bank and broker statements to verify against club records, including dates and beginning and ending balances.
- Verify total number of shares of securities; verify total dividends for the year.
- Verify recording of each member's payments.
Verification of Club Books - NAIC Resources
Verification procedures
- www.brucereed.com/InvestmentClubs/NAIC/verifying-books.html
Annual Verification Report
- www.brucereed.com/InvestmentClubs/NAIC/audit-report.html
Frequently Asked Questions
- Qualified dividends, ex-dividend date
- IClub issues
- Club dividends don't match 1099s
- Company-paid fees and commissions
- Is Fee for attending Treasurer's Workshop tax deductible?
- Can one member buy out another, in part or in whole?
- Options for total withdrawals
Frequently Asked Questions - Qualified dividends, ex-dividend date
Qualified dividends are dividends that qualify for a lower tax rate. For more information see www.irs.gov/publications/p17/ch09.html#d0e25582 and www.irs.gov/pub/irs-news/ir-04-022.pdf .
On security Dividend transactions (cash or reinvested) you need to enter an ex-dividend date. The dividend dates listed on Yahoo are the ex-dividend date.
There is a shortcut with the appropriate dates in place on www.brucereed.com under Investment Clubs. Note that you need to see dates including December from a year ago, because the ex-dividend date is a few weeks before the payment date.
NOCA defaults the payment date for the ex-dividend date on security Dividends. This is OK as long as the qualifying vs non-qualifying amounts matches your 1099s and is correct.
Money Market dividends are always non-qualifying.
Frequently Asked Questions - IClub issues
As of 2/18/04, there are some open issues with IClub software. These issues may be resolved by the time you do your year-end processing, and may even be resolved by the time you read this.
NCA 2.5.11, NCA Tax Printer, NOCA, and NOCA Tax Printer all have a problem with ex-dividend dates entered with 2002 dates, they are treated as non-qualifying. You need to use 1/1/03 for the ex-dividend date.
NOCA has a problem with Foreign Taxes. They cause some dividends to be non-qualifying (8 whole cents in my case, caused by $5 in Foreign Taxes). Also, the Form 1065 line for Foreign Gross income is the same amount as the Foreign Taxes withheld.
Frequently Asked Questions - Club dividends don't match 1099s
If your club records don't match the 1099s in the total of dividends, the first place to check is if your entries are all correct.
However, sometimes the broker is not correct. On stock splits and other events that change the security or number of shares, sometimes there are fractional shares. Usually these fractional shares are immediately sold as part of the split. In that case you have "cash-in-lieu-of" the fractional shares.
This is considered a sale of securities, not a dividend. Some brokers incorrectly (and stubbornly!) report these as dividends.
The important thing is reporting amounts correctly, not strictly reporting amounts as the broker reports them. Just be prepared to explain any differences between your reports and the broker's.
Frequently Asked Questions - Company-paid fees/commissions
The club receives a quarterly Dividend Reinvestment Plan statement that shows the current dividend paid and also "Tax Reportable Company Paid Fees and/or Commissions".
How are these fees recorded?
Company-paid fees and commissions are treated as additional dividends.
They are reported as taxable dividend income on the 1099-DIV form that your club receives at the end of the year.
Company-paid fees are added to the cost basis of the purchased stock.
In Club Accounting, Charges Paid by Company is listed under Securities, Enter New Transaction, Charges Paid by Company.
Frequently Asked Questions - Is Workshop fee tax deductible?
Is the fee for our Treasurer to attend a Treasurer’s Workshop a tax deductible expense?
Accounting workshops are generally accepted to be tax deductible, because they are for accounting, not for investing.
IRS publication 550 lists Investment-related seminars.
It states: "You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes." The general concensus is that this does not apply to the accounting workshops.
Ultimately, the club must decide: is an Investment Club Treasurer's Workshop considered a "seminar for investment purposes" or not?
Frequently Asked Questions - Can one member buy out another?
May a new member buy out a withdrawing member? May current members subdivide the withdrawing member’s shares among themselves? Are there fees involved?
No, No, No.
You can’t have one member buy out another member because it involves complex accounting and tax consequences.
Your Partnership Agreement can spell out how other members can make deposits which match a withdrawing partner's value.
This cash can be used to pay off the departing member.
There are special cases that may not have tax implications, such as one spouse transferring to another, but any special case will require knowledge of the specific tax implications for that case, and is not addressed in this presentation.
Frequently Asked Questions - Options for total withdrawals
What are the options for members making a total withdrawal?
- Club pays withdrawing member with cash on hand. This may or may not require the sale of securities to make enough cash available.
- Club pays withdrawing member with less cash than the member's cost basis and the rest in stock.
- Club pays withdrawing member with more cash than the member's cost basis and the rest in stock.
Frequently Asked Questions - Options for total withdrawals - Withdrawal paid with all cash
With cash payment, the club may have enough cash on hand, or may have to sell stock.
Selling a stock, at a gain or loss, has the normal ramifications of a loss or gain, but has no other direct effect on a withdrawal.
Frequently Asked Questions - Options for total withdrawals - Withdrawal paid with stock
If part of a withdrawal is paid with stock, the club is able to defer gain or loss from the stock until each member withdraws or the club disbands.
There is never a sale of stock, all earnings are deferred until the member realizes a gain at withdrawal.
However, usually there is no good reason for a club to defer a loss.
If the amount of cash received is less than the member's cost basis in the club, then all taxable gains are deferred until the sale of the stock, at the member's discretion.
If the amount of cash received is more than the member's cost basis in the club, then the difference is taxable gain, and the stock has a cost basis of zero.
Frequently Asked Questions - Options for total withdrawals - Other Considerations
Convenience of stock transfer - does the member also have an account at the club's broker?
Does the Partnership Agreement allow payoffs with stock?
Dividends received after transferring the stock.
Resources
NAIC
ICLUB
Yahoo
IRS
Resources - NAIC
Local
Minneapolis/St. Paul Chapter NAIC
P.O. Box 18264
West St. Paul, MN 55118
Voice Mailbox: 952-932-9686
National
www.better-investing.org
Toll Free: 877-275-6242
Email Discussion Lists
lists.better-investing.org - click on Club Treasurers
Club Treasurer's Duties
www.brucereed.com/InvestmentClubs/NAIC/treasurer-duties.html
Other information
old.better-investing.org/clubs/clubs.html#corner
Note - this site may be decommissioned soon.
Resources - ICLUBcentral
Web Site
www.iclub.com
NCA
NAIC Club Accounting for Windows V2
NOCA
NAIC Online Club Accounting
www.naic-club.com
Resources - NAIC Software
Available from ICLUBcentral
NCA $169
NOCA with Support $49/year
NAIC Club Tax Printer $59 (each year)
NAIC Club State Tax Printer $59 (each year)
Resources - Yahoo Stock Information
Stock Quotes
finance.yahoo.com
Click Historical Prices for prior days.
For Ex-Dividend dates, click Historical Prices, then select Dividends Only, enter dates from December 1 of the PRIOR year through December 31 of the TAX year, covering a 13 month period.
Resources - IRS
Web site
www.irs.gov ( NOT www.irs.com !)
Publication 541 - Partnerships www.irs.gov/pub/irs-pdf/p541.pdf
Publication 17 - Your Federal Income Tax, Dividends www.irs.gov/publications/p17/ch09.html#d0e25572
Form 1065 fill-in form www.irs.gov/pub/irs-fill/f1065.pdf
Form 1065 instructions www.irs.gov/pub/irs-pdf/i1065.pdf
Schedule K-1 fill-in form www.irs.gov/pub/irs-fill/f1065sk1.pdf
Schedule K-1 instructions www.irs.gov/pub/irs-pdf/i1065sk1.pdf
Acknowledgements/Questions?
Acknowledgements
Thanks to all who participate on the Club Treasurers email discussion list:
- the people who are brave enough to ask questions
- the people who are willing enough to provide answers
- and the people who were willing to take the time and review this presentation and provide feedback
Questions?
eMail me
This presentation can be found at www.brucereed.com click on Investment Clubs.