Monday, November 11, 2013

I HATE K-1s!

The titular character of KISS ME KATE hated men.  I hate K-1s with equal fervor.  Especially those for limited partnership, publicly traded or not, investments.  I can live with K-1s for actual business activities, although they, too, have issues.
All K-1s usually arrive late – anytime from the end of March to the beginning of September – more often than not causing the client’s return to be extended.  I hate GD extensions just as much as I hate K-1s (the GD is not "government deferred" or anything similar - it stands for exactly what you think it does).
As limited partnership investments, again publicly traded or not, are passive activities, there is added complexity, work, and agita involved in (1) determining whether or not, and how much of, the various types of income, deductions and losses from the K-1 are reported on the current Form 1040 and corresponding state tax return, and the multitude of forms and schedules thereof, (2) keeping track of “suspended” losses, and (3) keeping track of “outside basis”.
I have seriously considered telling my clients that I will no longer do tax returns for individuals who have in their current portfolio limited partnership investments that produce K-1s.  But I have not.   
While I have not done any specific calculations, I firmly believe that often the additional costs to properly prepare the federal and state income tax returns for taxpayers with K-1 investments is as much as or more than the actual income, or tax benefits if any, generated from the investment.  If the money invested in these limited partnerships were instead invested in related mutual funds I expect the investor would do better.  His/her tax preparation costs would certainly be less.
Of course brokers never tell their clients this when selling them the investment.
I have no personal knowledge of this, but I suspect that brokers receive a larger commission from selling units of limited partnership investments than they do from selling shares of stock or mutual funds.  I would truly appreciate hearing from anyone “in the know” whether or not my suspicion is true.
The bottom line to this post is this – think very carefully before permitting your broker to purchase a limited partnership investment (unless it is in an IRA account, which has no reporting requirements).  Do some research to be sure that the income or growth potential of the limited partnership investment is truly “more better” than a more traditional investment in stock or mutual fund shares. 
Any comments?

1 comment:

Elizabeth R., EA said...

I have read that if the K1 had Canadian Income, even if invested in an IRA, requires a Canadian return. Pain in the butt for a few hundred dollars of income.

K1's are a pain! But keep me employed.