- [Instructor] K1s are probably the most annoying
tax documents you'll deal with.
If you invest in any sort of partnership,
such as a private equity fund, a hedge fund,
various publicly traded companies
that operate as partnerships, or any sort of
real estate partnership, if you own local real estate,
you will get a K1.
This is true if your firm operates
as a joint venture also, in most cases.
Let me show you what a K1 looks like and what's in it.
Now, this is a generic K1.
Yours might look slightly different,
especially if you invest in a publicly traded
private equity fund, where they're going to
computer print everything, but in general,
you'll have the same information on all of the K1s.
In part one, you're going to have the
partnership's employer identification number
along with their address, name, et cetera, okay?
And then in part two, that's where
your information comes in.
For most people out there, you're probably going to be
a limited partner or other LLC number.
If you are in a partnership, for example if you're
an attorney, or an accountant operating
some sort of a partnership, you might be the general partner
but that's rare.
By definition, there's relatively few general partners
compared to the number of limited partners
in most big partnerships that are out there.
So when we get done with identifying your information
and the partnership's information,
they're going to go through and talk about
what's the profit, loss, and the amount of capital
associated with each of the partnership's
activities during the year, okay?
Now, in general, the key boxes that you're going to
want to pay attention to are all over here in part three.
In box one, you have your ordinary business income or loss.
It's very common for partnerships to have a business loss,
simply because of depreciation and amortization,
particularly in the real estate sector.
But in other cases, you'll probably end up
with business income.
In box two you'll have any net rental real estate income
that might come in.
In box five and six you'll have your interest income
and ordinary dividends, and in box seven
you'll have your royalties.
These are the major boxes that I see
filled out on most of the K1s that I've seen
or received over the years.
Beyond that, the reason that we have K1s
is because you'll be able to deduct
some of this income as either short-term
or long-term capital gains, depending on
how the partnership has been set up.
So the partnership will give you an opportunity
to reduce your taxable income.
So when we talk about master limited partnerships
that are publicly traded, any of the
pipeline companies, for example, on the stock market,
or perhaps any of the amusement park firms,
or any of the private equity firms that are publicly traded,
they'll often have capital gains and capital losses,
and that'll allow you to offset
some of the income you receive from the partnership
or some of your other income
that is non-partnership related.
The primary purpose in the K1s
is to reduce your taxable income.
That's why people like them.
On the other hand, the frustrating thing about K1s
is that unlike 1099s, in my experience
they're often very slow to arrive.
K1 distribution deadlines are the third month
after the close of the partnership's tax year.
For many companies, that means they follow the calendar year
so the K1 may not even get mailed to you until mid-March.
If you're anything like me, by that time
tax prep is already well underway.
This is true for most individuals and businesses.
Unfortunately, the late receipt of K1s
is just a fact of life.
It's going to be a non-stop hassle for you
or your accountant, but at least now
you understand what's in them and who uses them.