I have a client who invested in Hedge Funds and the activity is reported on a k-1. They have a line 11 on the K-1 as a statement with various types of income on this statement. Interest, Dividends and Capital Gains, I am moving into the appropriate K-1 lines. However, I have an income amount for a MTM election under 475. Where does this income amount get reported? Thanks, John
You want it to end up on Form 4797 Line 10. Input on the K-1 screen, Section "Line 11 Other Income," line item "Ordinary gain(loss) to be reported on Form 4797 Line 10." My guess is that the "passive" line below that may be more-correct, but you'd probably have to play around with it and see.
When a client comes in with a K-1 from a hedge fund, the first thing I want to do is shoot the client. We can't charge enough to cover the cost of processing those forms. If we can't figure out what to do, do you think the IRS employees would know if it was done correctly?
Can you warn clients that K-1's from hedge funds are so involved that, no matter how little money is on the K-1, you'll have to charge Five Hundred Dollars per K-1? Would that sort-of begin to cover it?
If they "die" from "sticker shock," perhaps you could say that this one year you'll "split it" with them and charge only $250 per K-1, but next year if they are still in that hedge fund, the full horrendous price will hold. (This will give them enough time either to find another accountant, or to resign themselves to paying the high fee that they deserve to pay.)
Maybe you could even send out a blanket letter to all clients, now, stating that those types of K-1's are so horrendous for you, that if anyone has one of those next year, the price is some large figure per K-1, which gives them some notice now. If they don't bother to read their mail, you can point to your office file copy of the blanket letter when they show up next year, and say they were warned, the price is $500 (or whatever you set it at) and no arguments, no discounts, no nothing.
The worst they could do is walk out. You probably don't need them in that case, anyway.
The Answer from allypoe is correct. The amount should be reported on "Ordinary gain (loss) to be reported on 4797, Line 10. It is not passive. This is an election that the fund is making which causes the amount to be recognized as ordinary gain/loss (as opposed to passive ordinary gain/loss).
If you can't charge your client enough to cover the cost of processing the form your client may not recognize the risk they are taking in investing in this type of alternative investment.
We have a client invested in close to 70 hedge funds, with some K-1's coming in at over 200+ pages. He is well aware of the risks in these types of investments and pays us very well to do his return. The return on investment on some of these can be amazing. It's a function of risk/reward.
