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Tax Filing and the K-1 Dilemma

March 30, 2017

By: J. André Weisbrod

Every year around this time a nationwide consternation builds up regarding taxes.  This is especially true for investors with diversified portfolios, and even truer for investors who own private investments, including partnerships, small corporations and LLCs.

I think people often get more agitated than they need to be.  Understanding the processes can help us relax a bit.

 

All businesses and investment vehicles must perform year-end accounting.  They need to verify numbers, have their accountants go over them and then they need to prepare their tax returns and issue tax reporting documents to their employees (W-2 or 1099 forms) and investors (1099 and K-1 documents).   Sometimes companies and partnerships have complex situations and it takes more time.  Sometimes errors are discovered and they need to issue corrected forms.  It can be quite convoluted.  

Our ridiculously complex tax system is responsible for most of it, so I have no problem making this recommendation:  If you don't like it, contact your Congressional (and state) representatives and tell them to reform and simplify.  They are the ones you should be angry with.  It’s about time for a taxpayer revolt.

Delayed reporting creates a chain reaction that can be frustrating for individual investors, advisers and other entities that can’t do their reporting until they get everyone else’s.  If one company or investment firm is late, it causes everyone down the line to be delayed. 

What is the solution?

One is to put all your extra money in a jar.  No 1099s or K-1s.  No interest, dividends or profits either.  But you still have to file a return.  Not a recommended solution.

Two, only invest in well-known public savings institutions, funds and brokerage accounts.  They usually finish and disseminate 1099s by the end of February.  However, they are known to make mistakes and have to send out corrected 1099s later.  Therefore, it is possible to get a corrected 1099 after you file your taxes, so beware of filing too early.  If all else is in order you just need to have all your personal accounting done and documented, and deductions squared away.  If so, then you have a decent chance of getting your taxes finished by April 15th. 

Three, relax and go on "extension."  I don't think my personal taxes have been completed by April 15th for over 25 years.  That's right.  I assume I'm going to get an extension, and it doesn't bother me.  I just need to make a good estimate of what I owe, maybe send in a tad more and I'm good.  The business filings create my pressure.  It ain’t easy, and we do the best we can to get it done as soon as possible.  But sometimes it just can’t be done.    Small businesses and partnerships can get extensions until as late as September.

Note that extensions are common.  Millions of people and businesses file extensions, and as far as I know, the IRS does not target anyone for audits just because of extensions.  Just make an estimate, pay approximately what is due, and you should be fine.

 

If extensions cause you great anxiety, then don’t invest in vacation property and rent it out.  Don’t invest in any private opportunities.  Don’t do anything entrepreneurial.  Use a jar and hide it well.

 

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J. André Weisbrod is founder of STAAR Financial Advisors Inc. and the STAAR Investment Trust headquartered in Pittsburgh, PA. He has been named a 5-star Wealth Manager in Pittsburgh Magazine and is among the longest tenured fund managers with over 20 years managing the same funds. He is also co-founder of the Strategic Assets Fund 1, LP, a private equity fund for accredited investors. He is an author and speaker and has been interviewed, quoted or had articles published in a variety of media including Investors Business Daily, TheStreet.com, The Wall Street Journal, Business News Network, the Pittsburgh Post-Gazette, USA Today, KDKA TV and Reuters TV.

Actively involved in church and community affairs, Mr. Weisbrod is committed to the well being of individuals, families and businesses. Avocations include competitive masters swimming, scuba diving, painting and photography, acting and music.

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