Investments can be complicated and yet quite simple as long as the record keeping is maintained at every transaction from the first purchase to dividend income and/or reinvestment.
Dividends in tax terms is somewhat like interest, except they a share of a company's profits passed on to the shareholders periodically. One of the primary advantages of owning this type of investment is the regular payment of dividend income. When I use the word dividends it will be in this context.
- Without any tax income document, specifically a K-1 in your situation there is nothing to report. An investment is not important to the IRS until it makes money or the purchase has been sold or redeemed.
- For 2020 there is nothing to report, therefore nothing is entered on your tax return.
In the future:
- The K-1 may show your capital account, however you should maintain an ongoing cost basis as you go along. Any dividends that are paid directly to you are income, but not more investment. If your dividends are used to purchase a greater share then they are taxable income and also, because of this, they are added to your initial investment which can make the record keeping difficult unless you are in the habit of maintaining up to the minute information. Excel can be good for this.
- Dividends are taxable income, however there is no deduction for providing a loan. Any interest received on the loan could be taxable interest income separate from the dividends.
- Your capital investment initially, as well as any capital contributed will be used to offset any sale or redemption when you want to get rid of this investment. At that time you will see that your investment is used to reduce your tax.
- For this investment, the K-1 will be the document that provides all the information you will report on your tax return each year.
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