1099-MISC vs K-1 -- duplicated numbers?

Question

I work for an investment management company (nothing fancy, just some administrative role) and had the opportunity to invest in the fund our company runs as a part of employee benefits.

Anyways, now I received multiple tax forms. One is K-1, issued by my company. And I received a few extra forms from our company's brokers.

On an 1099-MISC form, it has below

(IRS BOX) 8. Substitute payments in liew of dividends or interests

which is the roughly the same number with below item on K1 (I suppose some interests, dividends in the fund result in some discrepancy?).

CURRENT YEAR INCREASE (DECREASE)

The question is, did someone mess up? It appears the same income was taxed twice here. Even though I did not receive any dividends or interests directly from the fund, and I have never withdrawn my investments.

Or, should they really be the same thing and one form should be ignored? The K-1 has below paragraph which makes me think there is also chance that this is a duplication.

Please note that you may have received a form 1099 from the partnership for your share of interest/dividends from the partnership. This schedule k-1 includes your ratable share of all income, including any income that may have been reported to you on a form 1099 from the partnership.

Either way, if you can provide the reference to your answer that would be great. I am trying to get in touch with my company's finance department but they are really bureaucratic so I want to be super well prepared when talking to them.

Thanks in advance!

Answer 1

Well, you won't be double taxed based on what you described. Partners are taxed on income, typically distributions. Your gain in the partnership is not income. However, you were essentially given some money which you elected to invest in the partnership, so you need to pay tax on that money. The question becomes, are you being double taxed in another way?

Your question doesn't explain how you invested, but pretty much the options are either a payroll deduction (some amount taken out of X paychecks or a bonus) or some other payment to you that was not treated as a payroll deduction. Given that you got a 1099, that suggests the latter. However, if the money was taken out as a payroll deduction - you've already paid taxes (via your W2)! So, I'd double check on that.

Regarding why the numbers don't exactly match up - Your shares in the partnership likely transacted before the partnership valuation. Let's illustrate with an example. Say the partnership is currently worth $1000 with 100 outstanding shares. You put up $1000 and get 100 shares. Partnership is now worth $2000 with 200 outstanding shares. However, after a good year for the firm, it's valuation sets the firm's worth at $3000. Your gain is $1500 not $1000. You can also see if what happened was the firm's valuation went down, your gain would be less than your initial investment. If instead your shares transacted immediately after the valuation, then your gain and your cost to acquire the shares would be the same. So again, I'd suggest double checking on this - if your shares transacted after the valuation, there needs to be an explanation for the difference in your gain.

For reference: http://smallbusiness.findlaw.com/incorporation-and-legal-structures/partnership-taxes.html

And https://www.irs.gov/publications/p541/ar02.html Here you learn the purpose of the gain boxes on your K1 - tracking your capital basis should the partnership sell. Essentially, when the partnership is sold, you as a partner get some money. That money is then taxed. How much you pay will depend on what you received versus what the company was worth and whether your gain was long term or short term. This link doesn't go into that detail, but should give you a thread to pull.

I'd also suggest reading more about partnerships and K1 and not just the IRS publications. Don't get me wrong, they're a good source of information, just also dense and sometimes tough to understand. Good luck and congrats.