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Dont Cry Over Your K-1: Why High-Net-Worth Investors File Tax Extensions

Dont Cry Over Your K-1: Why High-Net-Worth Investors File Tax Extensions

The middle of April: Go-time for tax preparers, and a headache for Americans anxious to see where they stand with the IRS. While a lot of people use TurboTax and easily file their return for a tax refund from their couch, for many investment-minded taxpayers April is when they are preparing to punt their tax return for up to 6 months in the future. Today we will investigate why it may be beneficial for a taxpayer to file an extension, and delve into the main reasons high-net-worth investors are often forced to file extensions. 

 

Benefits and Drawbacks of Tax Extensions

There are often things beyond your control in life that cause you to be unable to file your taxes on time. Whether it is due to personal circumstances or other life events, if you can’t file on time for any reason, go ahead and file an extension. This will give you more time to make sure your return is complete and accurate and avoid any penalties for missteps from a rushed return. Since the law allows three years from the time a return is actually filed or two years from the time the tax is paid (whichever is later) to claim a refund from a return, the extension will effectively extend this clock by up to 6 months.

 

It's important to understand that filing an extension does not mean you don’t have to pay what you owe the IRS at the original filing due date in April. You are still required to estimate what you owe, if anything, and pay it ontime. This means if your return is relatively simple, it likely makes sense to go ahead and file in April. If your return is more complex, or you are waiting on additional documents to show your actual income, you can make a good-faith estimate of what you owe and plan to show a paper trail or documentation to the IRS if it is indeed incorrect. Whatever your return looks like, late taxes come with hefty fees, so plan accordingly. 

 

The Schedule K-1: Why Tax Time is a Headache for High-Net-Worth Investors

According to tax professionals who provide service to high-net-worth individuals, one of the main reasons wealthy taxpayers request tax extensions is because they are waiting for K-1 forms to be made available. A Schedule K-1 is an IRS tax form issued annually for certain investments or corporations with partnership interests, and pass-through entities where the tax liability falls on the shareholders. A unique form must be issued to every partner and/or investor involved, stating their specific interests in the property. K-1s are commonly issued by trusts in an estate, investments in hedge funds, and private equity investments…all of which are common investments for high-net-worth individuals. If you are an Opportunity Zone investor (or plan to become one) it is possible that you will be receiving a Schedule  K-1 from the Qualified Opportunity Fund you have invested in or will invest in. 

 

Typically, entities are slow to issue their K-1s. This is because they are relatively complex to put together, with different forms being required for each investor or partner. While K-1s are supposed to be made available by the middle of March, they often take much longer to actually arrive. Tax preparers say it's not uncommon for them to arrive until as late as September. For this reason, some investors are wary of adding investments to their portfolios that will be issuing K-1s. Even so, tax preparers providing services for high-net-worth investors report that some clients have dozens of K-1s annually. 

 

Alfred Peguero, a partner at the San Francisco office of PricewaterhouseCoopers’ Private Company Services group estimated in an interview with the Wall Street Journal that 90% of his clients file extensions, with the main reason being that they are waiting for K-1s to come in. Tax preparers often tell their clients with complex tax returns upfront to expect that they will be filing an extension. It is that common amongst these investors. 

 

If you are an investor in a Qualified Opportunity Fund or any other alternative investment and you are needing to file for an extension because of late K-1s, you are in good company. Many investors are in the same boat, there is no need to cry over your late K-1. 

 

Are you an accredited investor looking to invest capital gains in Qualified Opportunity Zone Funds? Check out our Fund Finder tool and be connected to the right fund for your goals. Have more questions? Join our Forum and discuss OZ investing with other investors, fund managers and OZ experts. 

 *Important Notice: OZ FundHub is not a licensed tax or accounting firm. All Information contained is for educational purposes only.*

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