Tax Reporting and Reconciliation of Hedge Fund and Other Alternative Investment Fund K-1s

Transcription

1 FOR LIVE PROGRAM ONLY Tax Reporting and Reconciliation of Hedge Fund and Other Alternative Investment Fund K-1s Navigating Footnotes and Tying Information to the Tax Return THURSDAY, MAY 19, 2016, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be ed to registered attendees. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE PROGRAM ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please immediately so we can address the problem.

3 Tax Reporting and Reconciliation of Hedge Fund and Other Alternative Investment Fund K-1s May 19, 2016 Chad B. Ribault Kaufman Rossin Glenn H. Salzman Kaufman Rossin Casey Gunther Kaufman Rossin

4 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

5 Tax reporting and reconciliation of Hedge Fund K-1s

6 Outline What is a Hedge Fund Hedge Fund Structures 3 Types of Hedge Fund K-1s Analyzing the K-1 along with key footnotes K-1 reconciliation schedule Tax Bases 6

7 What is a Hedge Fund? Does hedging have to occur? Differences between other types of funds Qualified Financial Assets & other investments 7

8 Hedge Fund vs. Mutual Fund Examples of tax differences: Net losses consequences State filings Short term capital gains Accrued dividends 8

9 9 Hedge Fund Structures

10 Domestic Partnership Structure Domestic Partnership General Partner Limited Partners Management Company 10

11 Domestic Partnership s Responsibilities Tax filings Withholding agent responsibilities K-1 disclosures and state forms/vouchers 11

12 Offshore Corporation Structure Offshore Corporation Management Company Shareholders 12

13 Offshore Corporation s Responsibilities Federal and state filings due to ECI Check the box election may need to be filed if formed as partnership 13

14 Shareholder of Offshore Corporation PFIC statement Controlled Foreign Corporation Filing Requirement for U. S. Transferors 14

15 Partner s Responsibilities in Offshore Partnership Form 8865 Schedule K-1 or Pro forma K-1 PFIC elections 15

16 Master-Feeder Structure Master Fund Domestic Partnership Offshore Corporation (Feeder Fund) General Partner Limited Partners Shareholders Management Company 16

17 Mini-Master Structure Master Fund General Partner Limited Partners Offshore Corporation Management Company Shareholders 17

18 Side-by-Side Structure Domestic Partnership Offshore Corporation General Partner Limited Partners Shareholders Management Company 18

19 Fund of Funds Structure Investee Fund #1 Investee Fund #2 PFIC Domestic Partnership General Partner Limited Partners Management Company 19

20 3 types of Hedge Fund K-1s 20

21 Trader Fund Seeks to benefit from day to day fluctuations in market price Substantial, frequent, continuous trading activity IRC Sec. 162 expenses Deductible interest expense - Schedule E. IRC Sec. 475 election option Reg Sec T(e)(6) - non-passive for purposes of the passive activity rules 21

22 Investor Fund Holds investment for long-term appreciation Periodic, infrequent trading IRC Sec. 212 deductions Deductible interest expense - Schedule A. Reg Sec T(e)(6) - non-passive for purposes of the passive activity rules 22

23 Trader vs. Investor reflected on K-1 Lines Items Cover letter Footnote 23

24 Fund of Funds Invests in other hedge funds Characterization of income depends on other funds May have entity level trading 24

25 Analyzing the Schedule K-1 Cover letter Footnotes trader and investor activity Net Investment Income Tax Passive vs Nonpassive 25

26 26 Trader K-1s

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30 30

31 31

32 32 Investor K-1s

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35 35

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37 37 Fund of Funds K-1s

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44 44 Nonpassive vs Passive

45 45 U.S. Government Obligations

46 46 PTP K1s

47 47 PTP K1s

48 48 Gain/(Loss) on Disposition

49 49 Deconstructing Line 11F for Trader Funds

50 Line 13W Two typical interpretations: An alternative to trade or business expenses on line 11F Deductions related to passive ordinary business income on line 1 50

51 51 Installment Sale Footnote

52 52 Interest Expense Limitation

53 53 Interest Expense Limitation

54 54 Interest Expense Limitation

55 Section (g) ( G election) Election can be made for each CFC and PFIC (for which a QEF election has been made) held directly or indirectly by the taxpayer 55

56 56 PFICs / 8621 Footnote

57 57 PFICs Excess Distribution Regime

58 58 Line 16 Foreign Transactions

59 59 Line 16 Foreign Transactions

60 60 Line 16 Foreign Transactions

61 61 Line 16 Foreign Transactions

62 62 Line 16 Foreign Transactions

63 63 Line 16 Foreign Transactions

64 64 Form 926 Footnote

65 65 Form 8886 Footnote

66 Reconciliation to Form 1040 k-1 Box # Amount reclass Amount 1040/Schedule line 1 475(f) gain/(loss) form 4797, part II, line 10 and 1040, line 14 1 Passive income/(loss) schedule E, pt II, col. G or F 1 interest, dividend, expense, etc. various 5 interest income 45,696 96, ,598 schedule B, line 1 6a dividend income 17,817 24,466 42,283 schedule B, line 5 11A 988 income/(loss) (21,915) 4,039 (17,876) schedule E, pt II, col. H or 1040, pg 1, line 21 11A other Portfolio Income 7,811 7,811 schedule E, pt II, col. J 11E cancellation of debt 10,942 10,942 schedule E, pt II, col. G and form 8582, line 3a 11F ordinary 475(f) gain/(loss) 95,066 95,066 form 4797, part II, line 10 11F nonqualified dividend 10,025 (10,025) 11F qualified dividend 14,441 (14,441) 11F U.S. gov t interest income 5,214 (5,214) 11F other interest income 91,688 (91,688) 11F 988 income/(loss) 4,039 (4,039) 11F trade or bus interest expense schedule E, pt II, col. H 11F trade or business expense (78,680) (78,680) schedule E, pt II, col. H 11F other ordinary income/(loss) 11,954 11,954 schedule E, pt II, col. J 13H int expense investing activities (10,175) (10,175) form 4952, and schedule A, line 14 13H int expense trading activities (46,622) (46,622) form 4952, and schedule E, pt II, col. H 157, ,301 66

67 67 Tax Basis Schedule

68 68 Supplemental

69 69 Supplemental

70 70 Supplemental

71 71 Supplemental

72 72 Supplemental

73 73 Supplemental

74 74 Supplemental

75 75 Supplemental

76 76 Supplemental