Start Investment Club - Investment Club Taxes: What do I Have to Watch Out For?

Investment Club Taxes: What do I Have to Watch Out For?

Save for some very special situations, your club is designated as a business rather than a collective of individuals, which means that if you find your personal taxes to be somewhat of a hassle, this might come as a disappointment. Investment club taxes require an extra measure of precision. If your club's finances are not reported to the IRS correctly, you may have the Securities and Exchange Commission breathing down your neck.

Club Software

The National Association of Investors Corporation, otherwise known as the NAIC or BetterInvesting, has software that when combined with accounting software can help your treasurer and secretary to properly and easily prepare your club's taxes. These computer programs will allow you to keep your portfolio balanced, your stocks and mutual funds in line, and track the participation and contribution of each and every one of your club's members.

Cautions

After a club has been established for a while, some of the individuals involved may be inclined to stop showing up, which puts the rest of you at a disadvantage. Each member of an investment club is expected to put forth effort enough to research stocks and other financial choices so as to not land the group's finances into hot water.

Sometimes, members will pay their dues late or not at all. While sometimes this is allowed for mitigating circumstances, some people will take advantage of clubs who allow them to do this consistently. These unscrupulous investment club members place the group at risk of becoming a security, especially if they withdraw amounts they did not earn.

If you are running a security and you report your club's finances as a partnership, you will be audited - and if doctoring of the books is discovered, well... We all heard about the Enron scandal!

Schedule K

If your investment club is, as most are, treated as a partnership, you will have to prepare Schedule K-1 and follow the instructions precisely for listing and reporting your share of the income, credits and deductions.

We recommend that you seek out a competent CPA for preparations of your taxes. He or she can fill out Schedule K for all of the members of your investment club -- and that way you won't need to worry about the stress of an inquiry into your club's practices. It’s better for the IRS, better for you.

Perhaps tracking your portfolio’s growth and what is taken in taxes can be a fun and educational experience as well!

Getting Started