One reason I like investing in publicly traded securities is there is relatively low effort for the transaction or maintaining the investment. However, in the past year, I've learned there are "high maintenance" publicly traded securities, which typically fall into the category of partnerships. Partnerships are intended to avoid the double taxation of corporations, since profits, losses and some deductions are passed through to partners via a schedule K-1. Since a partnership K-1 often generates a need for additional tax forms, filing a tax return becomes more complex and more expensive, if one pays a preparer. In my opinion, this is because the IRS wants to prevent individuals from using partnerships as tax shelters, which would deduct partnership losses against other non partnership income.
Since my tax return is already complicated, I don't want to add unnecessary complexity. Unfortunately, the level of complexity increase is the same for owning one share as it is for owning thousands of shares -- very high. Therefore, I've decided not to purchase any publicly traded partnerships for my portfolio, even though there are some attractive investments, e.g. Blackstone Group, L.P.
The way to identify a partnership is that the company will often, but not always, have the term Partner in their name, or the designation L.P. (limited partner) after the name. In addition, many oil and gas companies are limited partnerships and there are Proshares and Powershares DB ETFs that operate as partnerships. To confirm if a company or ETF is a partnership, I found the list at Tax Package Support very useful.
Hopefully, with this information I will be able to avoid a significant increase in tax complexity for a relatively small investment :-)
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This is not financial, investment or advice. Please consult a professional advisor.
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1 comment:
This post is so right.
A very long time ago, I owned Standard Pacific, which created a tax nightmare for me. I don't know if it's still the case now, but back then not only did you have to deal with the K-1 on your federal, but you were also liable for paying state income tax in some of the states in which they did business. There were a half dozen states involved, but most of the states had some minimum exemption. California, on the other hand, did not. Even though I lived in the Northeast Corridor, I ended up having to obtain and file a CA state income tax return just to pay $3 or something like that. I remember saying NEVER AGAIN!
Yet I didn't learn my lesson! Ten years later I felt that Terra Nitrogen was very undervalued and I bought it. It doubled in just a few months and I promptly sold it. I was very happy until tax time rolled around. That K-1 was so confusing and appeared to be wrong. I ended up calling the company and discussing it with them at length. They agreed and issued me a different K-1. Maybe some K-1 forms are simple, but this one was not. When I asked questions about it on tax boards, there was confusion even among tax professionals. I will never directly buy shares in a limited partnership again.
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