Choose your closing date:

While there is not a specific date during the year when these forms can no longer be used, there are some guidelines set by the IRS about clubs who consider closing early
IF THE CURRENT TAX YEAR FORMS WILL BE AVAILABLE BY THE DEADLINE TO FILE THE SHORT-YEAR RETURN, A PARTNERSHIP IS REQUIRED TO USE THE CURRENT YEAR YEAR FORMS.

Our accounting advisor offers the following advice on what this means for clubs.
-If a club disbands in December, their deadline is March 15 of the following year. Tax forms should ALWAYS be available by then so these clubs should always wait to use the new forms.
-A November dissolution has a deadline of February 15. Forms are usually ready by mid January to early February. These clubs should wait for the new forms to file their returns.
-An October dissolution has a deadline of January 15. Most years forms will be available by this date. If large tax law changes are enacted, forms may not be available by Feb 15. While this is uncommon, it has happened in the past.

Based on this, we recommend that clubs considering disbanding in the last quarter should wait until the new year to file, and use the forms for that year. To be safe, those dissolving in October can file for a 5 month extension using form 7004 to anticipate the event the 1065 forms are not ready by Feb 15.

 

How do I dissolve or disband my club?

It is important to note that the IRS and most states require terminated partnerships to file a final return within a specific time frame after closing down. In most cases, you cannot wait until the following year’s tax return deadlines to submit your final return!

To assist investment clubs in disbanding and filing their required final tax returns, myICLUB Club Tax offers a Final Return product for purchase for both Federal and State returns. These will generate a final “short year” return for the club, satisfying regulations for terminated partnerships. Requirements and deadlines do vary by state and are subject to change, especially with requirements for e-Filing, but this document provides some overall guidance about what to expect.

 

Note - you will have to write or type the the beginning and ending dates on all forms if you are planning to print and mail them in, instead of using e-file.

 

Choose your termination date:

IRS regulations require partnerships to file a final “short year” return by the 15^th day of the third month after the partnership has completely ceased operations. Generally, these returns are filed using the current year’s tax forms. (In other words, you cannot wait until the following year’s tax deadline to submit a final return for your disbanded club.)

However, the IRS also stipulates that if current tax year forms will be available by the deadline to file the short-year return, a partnership is required to use the current year forms. This means that in some circumstances the Final Return version of myICLUB Club Tax may not be available for clubs to use immediately after purchase.

While there is no specific date when a prior year’s forms can no longer be used for a final return, there are some guidelines set by the IRS about clubs who disband mid-year. Our accounting advisor offers the following guidance:

• If a club disbands in December, their deadline is March 15 of the following year. That next year’s tax forms should always be available by then so these clubs should always use the new forms even if it requires waiting a few weeks.
• A November dissolution has a deadline of February 15. IRS forms are usually ready by mid-January to early February. These clubs should wait for the new forms to be incorporated in myICLUB Club Tax Federal - Final to file their returns.
• An October dissolution has a deadline of January 15. The new year’s forms will be available in myICLUB Club Tax Federal - Final by this date. If major tax law changes are enacted, however, forms may not be available until as late as February 15. While this is uncommon, it has happened in the past.
  
  Based on this, we recommend that clubs that are considering disbanding in the last quarter of the year should wait until the new year to file their final return, and use the forms for that year. To be safe, those dissolving in October can file for an automatic six month extension using form 7004 to anticipate the event the 1065 forms are not ready by February 15. We offer an e-Filing service for submitting Form 7004 to the IRS with near-immediate confirmation.

 

Two other things to keep in mind:

1. File in a timely manner. It is better to file on time and later need to make a correction than to file late and hope nobody notices.
2. If the tax law changes, a dissolving partnership must follow the law in effect for the year in which it dissolves—no matter which year’s forms are used. For example, a club dissolving in April 2024 would need to use 2024 law even if using the 2023 tax forms. Significant law changes can be a problem for customers even using myICLUB Club Tax Federal - Final to file a final return depending on the timing of the club’s termination, so it can be prudent to delay the club’s termination date until later in the year so that the following year’s forms and deadlines apply
   
   One example is the split of dividends into qualifying and non-qualifying. Clubs with lengthy histories will also remember when capital gains were split into three categories (long-term, medium-term and short-term), and then reverted back to the former two categories just a year or so later. In those cases, the previous year's tax forms would not produce an accurate final return for a dissolved club or provide accurate information to partners.

 

Before completing a short year final return, be sure that you have received all income from your club's bank and brokerage accounts (most especially dividends, both reinvested and received as cash, and account interest). If you do not, you may end up getting a dividend or other income after you've already disbanded the club and handed out the checks. If this happens, your club is not terminated, and you may need to delete and re-enter all final member withdrawals, write additional checks or make additional transfers, and regenerate your final returns. Remember, your club is officially disbanded when you cut the checks, not when the vote takes place.

Keeping the above in mind, there are two ways to dissolve the club and distribute the proceeds among club members; the "Cash Only" method and the "Cash and Stock Transfer" method. If there are gains on some of your unsold shares, there may be tax advantages to the Cash and Stock Transfer method; please consult your tax adviser. Please remember that after you disband the IRS requires you to file your final tax return by the 15th day of the third month after operations have ceased. This “short year” final return will cover the period from the start of the year up to the date that operations ceased.

 

Keep an eye out for dividends!

Clubs should be aware of when dividends will be issued. This will prevent receiving cash or shares because a security was owned past the ex-dividend date.

For myICLUB members, simply go to the Calendar tab in your club website. Make sure the Portfolio box is selected, and myICLUB will show upcoming ex-dividend and payment dates. This can still take some figuring, as companies are under no obligation to make sure their ex-dividend and payment dates all line up conveniently for clubs, but it can make determining a good date an easier process.

It can be a good idea for the club treasurer to process their withdrawal only after every other member has been withdrawn. If a small amount of interest or a dividend is received during the time the withdrawals are being processed, it can simply be added to the treasurer’s withdrawal amount. We call this a “treasurer’s premium,” and consider it a small gesture to acknowledge the treasurer’s efforts. Make sure the club has signed off on this practice in advance.

 

Cash only, or Cash and Shares?

Once the club has a reasonable target termination date chosen, it's time to decide whether any of the withdrawals will include transferring shares to members. While selling all of the club's shares and giving members the cash is usually the quickest option, it's also the one most likely to generate capital gains on which members will be responsible for paying taxes when they file their personal returns.

The following steps assume that the club will be transferring at least some shares to members. If that is not the case, Skip down to the "Cash Only" withdrawal steps.

 

Sell securities that would generate a loss, and/or that nobody wants

First check if there are any securities that the club could sell for a loss. The easiest way to check this is by going to Accounting > Members, and clicking the withdrawal calculator link. Choose any member, and click the Calculate button. The site will show securities suggested for transfer to the member, and then securities which would generate a capital loss.

Next, check if there are securities that nobody in the club is interested in. For example, the club might hold a penny stock like Charlotte's Web (CWBHF). While selling it might generate a capital gain, it might be better to do that instead of having members feel that they have been forced to take shares of a company they don't want.

 

Confirm your brokerage’s policy for transferring security shares

Some of the more common issues we have seen in the past:

• The brokerage may only transfer securities to members who already have a personal account with the brokerage.
• The brokerage may charge a fee to transfer security shares to another brokerage.
  • If so, be sure to enter an expense to account for this fee before entering any withdrawals
• The brokerage may only transfer whole shares.
  • If so, sell any fractional shares before starting to work on member withdrawals

 

Determine how many shares of each security each member will receive

There are two general methods for this:

1. Have members select the securities they are interested in receiving. This can prevent members from receiving securities they don’t want, and may also help cut down on the number of security transfer requests. If it turns out nobody wants the club’s Acme Widgets stock, for example, then the club can simply sell those shares. This can be time consuming though, so it may not be for everyone.
2. Divide each security among all of the members, based on their percentage of ownership (so that every member receives a few shares of each security owned in the club portfolio). This certainly makes more work for the treasurer who has to figure out how many shares of each security should go to each member and then process each transfer. In a club of ten partners that owns 15 different securities, a total of 150 transfers would have to be arranged! It may also result with members receiving securities in which they have no interest. Aside from the time needed to figure out how many shares to give each member and to process the transfers, however, this method can certainly be less contentious than the previous one.

 

Enter the withdrawals

1. Record all final transactions in all accounts. This includes selling any shares that won't be transferred, as well as recording all dividends, income, expenses, etc.
2. Enter a New Securities Valuation in myICLUB. Use a date after the last transaction entered in step 1.
3. Withdraw all members who are receiving shares of securities. Include any brokerage charges incurred as withdrawal fees.
4. myICLUB will not accept two securities withdrawals with the same effective date. The withdrawals can all be entered at once, but each withdrawal with a securities transfer must be dated as if it happened one day apart from any other withdrawal. Make sure that the payout and effective dates match for each withdrawal.
5. One day after the last securities withdrawal, create a new, cash-only Securities Valuation.
6. Enter the cash only withdrawals on the date after the valuation date from the previous step. Do not charge any withdrawal fees. These withdrawals can all have the same date, one day later than the previously-created cash-only valuation.
7. The payout date should be the same as the Effective/Transaction date for all of the Cash Only withdrawals.
8. Once the final withdrawals are complete, print and distribute all members Withdrawal Distribution Reports.

 

This example may help. Imagine a disbanding club with ten members. Half of the members want just cash, and half want some shares. The club has entered all final transactions as of Friday of a given week. The treasurer sits down over the weekend, and creates a new valuation, using closing prices from Friday.

The treasurer starts working on the withdrawals for members who want shares of securities, starting with a Monday date.

Since myICLUB needs to have each “Cash and Stock Withdrawal” entered on a separate date, the next withdrawal is dated Tuesday. Because the two dates on a final withdrawal need to match one another, the treasurer enters Tuesday as both the Payout and Effective/Transaction date. This is repeated for each Cash and Securities withdrawal, so that the final withdrawal will show Friday for both the Payout and Effective/Transaction date.

Once all of the Cash+Security withdrawals are complete, create a new Valuation dated one day after the last withdrawal. This will be a cash-only valuation because all of the club’s securities have been sold or transferred. If for some reason this is not the case, enter the final Sell of any leftover shares dated after the last Cash+Security withdrawal, and then create a new valuation on the day *after* that final sell transaction.

The treasurer can then enter the withdrawals for all members who want only cash. These withdrawals can all share the same Effective and Payout date, one day after the cash only valuation. NOTE: Since all withdrawal values are based on the Valuation and Member Status reports, there is no impact or problem if the withdrawals end up being dated on a Saturday, Sunday, or holiday.

 

If, for any reason, the club receives money after the withdrawals have been entered, please see FAQ 1473 at: http://www.iclub.com/faq/index.php?solution_id=1473

 

Once all withdrawals have been entered, you can skip down to the section on generating the final club tax returns.

 

NOTE ON CAPITAL GAINS WHEN TRANSFERRING SECURITIES TO A MEMBER

Assuming a member eventually sells any securities that were transferred to them, their capital gain amount will be based on an adjusted cost basis, determined in part by the value of the security used when calculating their withdrawal—not the capital gain based on the club's original purchase price. For a more in-depth explanation of the adjustments done at the time of withdrawal, please see http://www.iclub.com/faq/index.php?solution_id=1414

Whether the gain is considered Long- or Short-term, however, is determined by the date the club originally acquired the security; not the withdrawal or transfer date.

Some brokerages may not be familiar with partnership regulations, so if you transfer securities, make certain to remind the members to hold on to their withdrawal reports. When it comes time to report their capital gains, the cost basis information on the withdrawal report should be used to make sure the amount and term of the capital gains are reported correctly to the IRS.

Once all of the above is complete, use myICLUB Club Tax Federal – Final to generate the club’s final return. The "final return" box on Form 1065 will automatically be checked if you print PDFs after the taxes have been run.

 

Cash Only Withdrawals Method

1. Sell all Securities.
2. Enter all "Sell" transactions in myICLUB.
3. Record all final transactions; this includes dividends, income, expenses, etc. We strongly suggest checking the dividend schedule for your securities so that you do not end up in a situation where the club receives a dividend after all member checks have been sent out.
4. Create a Securities Valuation for the day after all transactions have been entered.
5. Print a Member Status Report on this last valuation date.
6. Withdraw all members one day after the last valuation date. Do not charge any withdrawal fees. Since this is a final withdrawal, make the Payout date the same as the Effective/Transaction date.
7. Print the Withdrawal Distribution Reports for all members.

If, for any reason, the club receives money after the withdrawals have been entered, please see FAQ 1473 at: http://www.iclub.com/faq/index.php?solution_id=1473

To process your final tax return you should print and keep copies of the following reports:

• The withdrawal distribution report for each member.
• A copy of the valuation statement that was used to disband the club.
• A copy of the Income and Expense report and the Balance Sheet.
• A copy of the Transaction Report for the entire year to date.
• A copy of each members Individual Valuation Units Ledger from the time each member joined the club.
• A copy of the Security Transactions History or Individual Security Ledger, for each security that you sold or distributed to members.

The IRS currently requires you to file a final Form 1065, K and K-1 forms by the 15th day of the third month following the date operations ceased.

 

Producing the Final Forms

1. Purchase Club Tax Federal – Final (and Club Tax State – Final if needed) from the Taxes tab of myICLUB.
2. Click on the Taxes tab in your myICLUB club, and click the Go button on the option for the final return purchased.
3. If prompted to generate a year-end Allocation of Income and Expenses, go to Accounting > Utilities > Allocate income and expenses, and perform an allocation for the current year, then return to the Taxes tab of myICLUB.
4. Just above the first regular question, you may find a check-box signifying that the club has closed. Make sure to put a check-mark in that box.
5. When generating the tax return, you will be asked to enter cost basis information for all securities sold during the year. If your brokerage can provide information that would normally appear on the Form 1099 at the end of the year, go ahead and use that information. If not, we suggest filling in the cost basis figures calculated by the myICLUB. The 'Basis not reported', and 'No 1099 received' options should only be used if your brokerage can verify ahead of time what information will not appear, or not be reported on Form 1099. If there is any doubt, fill in the cost basis information from the myICLUB.
6. When the tax forms have been generated, you will be returned to the page that shows up after clicking the Go button; the forms available to download will look the same, except that they will only include information from January of the year the club dissolved, up to the club closing date, as well as including a check-mark in the 'Final Return' box for the 1065, and each member K1 form.
7. Don't forget; once the forms are printed out, you may need to fill in the date fields at the top of the 1065 and K-1 forms, to reflect that the club was in operation from January 1st of the current year, until whatever date the withdrawal checks were cut for the members.

 

What to keep after the club closes

The treasurer (or other officer of the club) should keep the following:

• All tax-related records a minimum of three years, but preferably seven.
• If there are any years when the club did not file Form 1065, records for those years should be kept forever.
• Copies of tax returns should also be kept forever.

This list is based on our reading of the following IRS web site:

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Recordkeeping