Hedge Funds Need To Do This Before Year End Tax Reporting
FAS CPA & Consultants
Fund Manager? Are You Aware Of The New Reporting Requirements?
A lot of changes have been made to the reporting requirements you are used to. Many changes were introduced during 2019, but of course, a lot of changes were made in 2018 with the TCJA, too.
Tax Basis Capital Reporting
You no longer have a choice: you are now required to report each partner’s capital account using the tax basis capital method. If you do not keep track of the information required to compute tax basis capital, you have to start right now.
Improved Quality Of Information
According to the IRS, higher-quality reporting is required from partnerships. Although the new form is not available yet, a draft of the 2019 form showed several additions:
⇒ Now you have to include disregarded entity names and Tax Identification Numbers along with the individual beneficial owner’s information.
⇒ Your K1 must now add, for any securities contributed to the partnership, the unrecognized balances and realized gains or losses for those securities
⇒ Qualified Business Income is no longer a single line item. Now, it is covered by a whole section.
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New QBI Worksheet
The new tax law of 2018 included a QBI deduction break for owners of pass-through entities, which might reduce their maximum tax rate. To calculate the same, a new worksheet for the individual taxpayer has been released, but only in draft form so far. It must be used to calculate QBI reporting on schedule K-1 (Section 199-A). The new form 8995 includes a flowchart for determining restrictions and limitations for every business that creates QBI. Every business needs a separate form 8995. Since all QBI deduction limitations and restrictions are all set at the owner level, year-end planning must include an analysis of salaries, timing, and distribution of income.
Revisit Your Capital Strategy
Net interest expenses that exceed 30 percent of adjusted taxable income (ATI) deductibility is limited. Through 2021 ATI will be computed free from depreciation, amortization, or depletion. Come 2022, this will change, and the same will be included, which means your ATI might decrease – which will limit your interest expense deductibility even more.
Basic Tax Reporting
⇒ IMPORTANT: Remember the estimated income tax payments due to states and municipalities
⇒ Do you have current W(s and W*s for all your investors. Some of these forms have expiration dates and need to be filled out and signed again.
⇒ Reconcile the 1099s as they come in and reconcile it with the fund’s records.
⇒ Brokers often record transactions differently. Review these differences early in the tax preparation cycle.
⇒ Are you thinking of moving to the 475(f) mark-to-market election for 2020? Analyze and discuss it now. There are deadlines that you have to adhere to.
No Partnership Capital Reporting Until 2020
The IRS just postponed the need to report partner’s shares of partnership capital on the tax-basis method for 2019 until 2020 – for partnership tax years starting on or after January 1st, 2020. It is doing this based on some concerns that not all partnerships required to comply, will be able to do so by 2019.
2019 Taxpayers can, therefore, continue to report capital accounts under any method available in 2018. This includes the tax basis, see Section 704(b) GAAP or any other reasonable manner.
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Requirements For Reporting A Partner’s Share Of Net Gain Or Loss
At the same time, the IRS explained requirements for partnerships and other persons to report partners’ share of the unrecognized gain or loss in terms of Section 704(c) by defining the term in the notice.
The notice describes a partner’s share of “unrecognized net Section 704(c) gain or loss.” It is the partner’s share of the net of all unrecognized gains or losses under Section 704(c) in partnership property. It includes Sec. 704(c) gains or losses that arose from the revaluation of partnership property. Publicly traded partnerships are exempt from this requirement until further notice.
Reporting Of Partner Information About Sec.465 At-Risk Activities
The above requirements in the 2019 draft instructions will not be valid until 2020.
For Those Who Comply Already
Those partnerships that comply with the reporting requirements in the notice, in any case, will be free from penalties, including penalties for:
⇒ Section 6038 failure to supply information required on a Schedule K-1(Form 8865).
⇒ Section 6698 failure to file a partnership return that contains the required information.
⇒ Section 6722 failure to furnish correct payee statements.
In respect of the 2019 Form 1065, US Return of Partnership Income; Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., Item N; and Form 8865, Return of US Persons With Respect to Certain Foreign Partnerships, Schedule K-1, Item G.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
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