Where do i report income as an investor from flipping property through partnerships in individual projects ?

[yuber]

There is a real estate company, that, among other things, sources individual projects, invites investors and once sold distributes profit at a preagreed ratio (75% to the firm and 25% to investors) and in accordance with all investors' shareholding %.  I get 1099 yearly with the amount of income on such investments appearing in the box # 3 of the 1099.  Where should i report such income ?

[Carl]

You will not report any of this on your personal tax return. The partnership (or whatever, be it an S-Corp or C-Corp maybe) will file its own completely separate tax return. A 1065-Parnership Return if a partnership, or an 1120 or 1120-S if a C-Corp or S-Corp. You can't even start your personal return, until after the business has filed it's own return.

The business will issue each partner or owner a K-1 and any other necessary tax documents, which those partners or owners will then use to complete their personal tax returns. If investors received any payouts or dividends on their investment, then the business also has to issue each investor the appropriate tax reporting document.

If you've never dealt with this stuff before, you need to see a tax pro for at least this first year. Do it wrong, and the fines, penalties and late fees can easily bankrupt the business before it even gets off the ground.

To tackle this yourself (which I do NOT recommend) you'll need to use TurboTax Business (different from Home & Business). TurboTax Business is not available as an online product, and is not available for MACs. IT's for the Windows platform only. You can purchase the CD at https://turbotax.intuit.com/personal-taxes/online/self-employed.jsp

Once you pay for it, you can download the installation file immediately and install it, so you don't have to wait for the CD. If you want a CD mailed to you, make SURE you specify that when you buy it.

[yuber]

Thank you, Carl for your prompt and detailed answer.  However, my understanding is that a 1099 is basically a notification to IRS of amounts distributed from an established business having a Tax ID to individuals, etc.  As it is minus from THEIR books, it has to be added on the recipient's end.  In this case, as an Investor, I should be reporting this SOMEWHERE on my tax return.  In the first year, I was in a hurry and reported it on Sch C.  This year I was researching this and clearly it doesn't belong on schedule C because I am basically a passive investor.  Given this was a real estate project, I was hoping it would be reflected / treated as "capital gains" as opposed to "ordinary income".

[Carl]

If you have a 1099-MISC with your SSN on it, your references to shares, ratios and the such was misleading. With an amount in box 3, as far as the IRS is concerned, it's SE income. Especially if this is something that will repeat itself from year to year. Sounds to me like the income is not reported correctly by the issuer of the 1099-MISC. But that's not your problem. To enter the information you still enter it as a 1099-MISC, but there's a special way in the program so it's not on SCH E or C. The method is below.
Reporting 1099-MISC (box 3 or box 7) that is not self-employment income
Under the Wages & Income tab (or Personal Income tab) scroll down to Other Common Income and elect to start/update Income from form 1099-MISC. Then click YES to indicate you have a 1099-MISC.
Enter the 1099-MISC exactly as printed, and then Continue.
Enter the reason you got this money – be it scholarship, bonus, streaking butt naked across the 50 yard line of the super bowl, whatever. Then continue.
Select None of these apply, then Continue.
Select No, it didn’t involve work….. and Continue.
Select ONLY the tax year for which this specific 1099-MISC was issued. Do not select the year that you received the 1099. Select the year for which the 1099-MISC was issued. Select no other year. Then Continue.
Select No, it didn’t involve an intent to earn money, then Continue.
Select NO, then Continue.
Click the DONE button, and that does it.

As you can see, the above is not true in your case, because it does involve an intent to earn money. So if you told the truth, the IRS considers you self-employed. This tells me the 1099-MISC is not the correct vehicle for the issuer to be using. I'm confident any competent CPA would agree.

[yuber]

Again, firstly, I very much appreciate your prompt and very thorough explanation with a practical solution (way out).  

I think I share your view about the 1099 Misc may not be the correct vehicle for the issuer to be using.  I think it serves THEIR purpose but doesn't work that well for the passive investors.  I am going to share your opinion with the CEO of the company and see his reaction.  

However, on the point that IRS would consider me self-employed simply because of the "intent to earn money", I would appreciate more convincing evidence.  I do NOT in any way work for the issuer of the 1099-Misc, nor I receive any compensation as salary.  

Once again, thank you very much for your help in the matter.

[Carl]

Don't get upset please. This is just a public user to user forum of users helping each other. (Or at least trying to). We all make mistakes, and that's how we learn. With the 1099-MISC, that income is not considered investment earnings by the IRS. It's considered earned income that you earned by actually working for it. The company that issued it (from their perspective) doesn't consider you an investor for that specific income. They consider you a contractor that provided goods or services to the company that issued that form to you. Please show this to the CEO too. In fact, you should be conversing with the CFO on this, not the CEO. The CFO is the one who signs that paper attesting things are right, and risks legal problems if they're not.

[yuber]

I am NOT upset and read my post again to see how could I have conveyed that impression.  Anyways, rest assured I am not upset.  I have communicated your post to the CEO and lets see his reaction.  I don't have the CFO's email.  If I receive a reply, I will post it FYI.  Thanks again.

[Carl]

Appreciate it. Hopefully, we can get this clarified and both learn something new in the process. I do know that box 7 income is SE with practically no exceptions. But box 3 income is "usually" se income paid for things like side jobs you do outside of your W-2 work for that W-2 employer. That work may or may not be related to your W-2 work, but the employer treats that differently. Usually as a way to get out of paying the employee overtime. I've also seen scholarships reported in box 3, where my above entry instructions would apply and be applicable for that. I'm curious to see how this works for you, if not as SE income as the IRS would consider it, based on the information we have so far in this thread.

[Carl]

I altered the aforementioned instructions a bit, so as to "tell the truth" based on the details you've provided, (as best as I can interpret them) and it still generates a SCH C. So based on the details, the IRS would consider it SE income. So that's why I still stand on my statement of the income being incorrectly reported to the IRS by the payer, and incorrectly reported to you by the payer.
Basically, when I answer the questions posed by the program for the box 3 income, and answer them as truthful as I can, the IRS considers that I received that income for providing a product or service in exchange for it, and I'm expected to pay the additional SE tax on it, via the SCH C.
What document should have been issued, is dependent on how the business is structured. For example, if it's an S-Corp then most likely the correct form is the 1120-S K1 with your share of payout reported to you in box 5, 7 or 8.
See the form I believe it should have been reported to you on, at <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/f1120ssk.pdf">https://www.irs.gov/pub/irs-pdf/f1120ssk.pdf</a> (Assuming the business is structured as an S-Corp, which is most likely)

[yuber]

I see the basis of your argument.  It seems like the issuer has more "flexibility" to use 1099 Misc to get away with a better option and stick it to the investors.  The IRS rules shouldn't allow such flexibility unless it comes with compensating mechanism that ensures equity.  Investors can only opt OUT of such investments but most won't even pursue this as it is too too technical for them to even "feel" that it exists.

[Carl]

There is that reference in the IRS pub where box 3 is for awards, prizes, and other. The problem is, "other" is not defined, and they don't specify what "other" should not include, at least. But there are other pubs (like the one for the 1120-S K-1) that specifically states to use that form for distributions like yours. In fact, that's what you have - a distribution, and not a payment, or even a return on your investment. You have ownership in the business, and received your share of the profit as a distribution. At least, that's how I see it.

[yuber]

Makes sense.  Thanks Carl.  Should the Manager of the Investment file shuch form OR me as an investor?

[Tona1997]

I don't work with any investor or any LLC, Partnership, S Corp, or Corp.  I purchase houses and remodel the house myself.  Do I enter my winning in form 4797 or the schedule C?  

[Carl]

@Tona1997 

I purchase houses and remodel the house myself.

So you're a house flipper in the business of flipping houses without renting them out for one single day?

Do I enter my winning in form 4797 or the schedule C?

Winnings? Are you talking about gambling winnings now?

Please start your own new thread outlining your specific and explicit situation so we can assist you better. When you post as an "add on" to an existing thread, the chances of confusing the reader resulting in you getting WRONG information is extremely high.