14 Tax Changes for Hedge Funds and Private Equity Under the Trump Tax Reform

Funds typical structure is design as a master fund structure. This is the cornerstone to protect investors and create a classification for U.S., foreign and non-profit clients. The master fund will be divided into a U.S. Feeder Fund and a Foreign Feeder Fund. Within the same structure the investment manager is also a foreign entity.

There many offshore jurisdictions such as Cayman, Bermuda or Bahamas, that can be used as the base for the foreign feeder fund and the investment manager. Cayman is usually the location of choice for many reasons, including its proximity to the U.S. and its legislation in addition to be first tier offshore center.

Hedge Funds and Private Equity deal with operational challenges in three key areas:

  • Minimize investor tax burden
  • Regulation compliance
  • Financial goals achievement

In addition to the operational challenges, hedge funds and private equity funds they both deal with internal structuring involving:

  • Investment partnership
  • General partner
  • Portfolio companies
  • Limited partners

The complexity of operational challenges and internal structuring result in the need for tax planning for:

  • Cash flow distributions
  • Valuation
  • Distribution
  • Diversification
  • Transfers

Finally with the Trump Tax Reform, fund managers should consider changes to the fund structure as the result of important tax changes:

  • Carried interest: if a partnership interest is sold before 3 years.
  • Itemized deduction: management fees are not tax deductible anymore until 2025.
  • 20% Business income deduction: fund partners are allowed 20% income deduction subject to W2 wages paid.
  • Business loss limitation: fund partners losses are limited to $250K if single, double if married. Any excess will be carried forward.
  • Controlling Foreign Corporation (CFC): income from CFC is taxable and should be included into partners personal tax return subpart F.

FAS CPA & Consultants is committed to help Hedge Funds and Private Equity Funds to plan for an efficient tax strategy. Our accounting, consulting and tax return preparation services are designed to provide you peace of mind.

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Tax reform introduced several changes to such as the Qualified Business Deduction and 100% bonus depreciation to create incentive for capital investments. There are changes also on the interest deduction and loss limitations that will be a consideration for capital budgeting.

Section 199A – 20% Deduction

In terms of the above, a 20% deduction for Qualified Business Income (QBI) is applicable for Individuals, Estates and Trusts resulting in a 29.6% effective rate.

Limitations of Section 199A Deduction

50% of the allocable W-2 wage expenses from the QTB, or 25 % of the allocable share of the W-2 wage expenses from the QTB plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) on qualified property.

Aggregation of Trade or Business

  • Trades or businesses can aggregate if the individual can demonstrate:
    • That the same owners own 50% or more of every trade to be aggregated:
      • Ownership in partnerships is determined by reference to capital or profits in the partnership.
      • Attribution applies between and individual and his/her spouse (if not legally separated), children, grandchildren and parents.

The Calculation Of Adjusted Taxable Income

One way to approach this is by fragmenting the company. If you leave all the income in one entity and isolate all the expenses into another entity, to inflate the income of the entity incurring the interest expenses. This is what Section 163(j)(8)(A)(i) specifically refers to as any “deduction or loss, which is not properly allocable” to the business. With careful restructuring using flow-through entities and consolidated compliance elections, lawful avoidance of Section 163(j) is possible.


Many businesses are exempt. A real property trade or business can make an election under Section 163(j)(7)(B) to be exempt from the new Section 163(j) limitations.

What Does it Mean?

It means a real estate business could use earnings-stripping strategies to reduce its entire US tax base and pay zero federal income taxes.

More exempt enterprises:

  • Farms
  • Energy Providers
  • Water & Sewage Services

Check Our Video Presentation Tax Planning For U.S. Hedge/Equity Funds

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