Investment Advisor Roundtable 2015 Year-End Tax Update November 4, 2015

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1 Investment Advisor Roundtable 2015 Year-End Tax Update November 4, 2015 MEMBER OF PKF NORTH AMERICA, AN ASSOCIATION OF LEGALLY INDEPENDENT FIRMS 2013 Wolf & Company, P.C.

2 Wolf & Company, P.C. Founded in 1911 Over 180 professionals Offices: Boston, Massachusetts Springfield, Massachusetts Albany, New York Livingston, New Jersey PCAOB Registered & Inspected Member of AICPA Center for Audit Quality Member of PKF North America 2

3 Investment Advisors and Funds Wolf & Company provides guidance to investment advisors and alternative investment funds by offering a broad range of audit, tax and consulting services including: Financial statement audits & reviews Tax planning and compliance Service Organization Control Reports (SSAE 16/ SAS 70) Global Investment Performance Standards (GIPS) verification SEC security count examinations Merger and acquisition planning and due diligence Consultations regarding: Organizational structure Partnership allocations Succession planning Compensation strategies Alternative investment valuations USA Patriot Act reviews Disaster recovery planning Data privacy guidance Network security reviews Technology risk assessment 3

4 Today s Presenter Michael C. Stravin, CPA, MST Member of the Firm Phone: mstravin@wolfandco.com

5 Today s Agenda Tax Update Planning Strategies Look Ahead Questions & Answers

6 Partnership Interests as Disguised Payments for Services Proposed regulations issued 07/22/15 - Effective date = TBD - IRS intent = apply the standards in the interim Targeting management fee waiver arrangements - Increased scrutiny since 2012 presidential election Management fee waiver - Management company waives right to receive management fee in exchange for a carried interest in fund profits and distributions held by the management company or affiliated entity - Potential benefits to manager o Convert ordinary income into long-term capital gains o Deferred recognition of income Proposed regulations are consistent with IRC 707(a)(2)(A) - Performance of services + allocation & distribution of income = disguised payment for services 6

7 Partnership Interests as Disguised Payments for Services Six factors indicative of disguised payment arrangement - Transitory partnership interest held by service provider - Allocation & distribution received within timeframe comparable to timeframe for payment to 3 rd party service provider - Service provider became partner primarily to obtain tax benefits that would not have been available if services were rendered in a 3 rd party capacity - Value of service provider s interest is small in relation to the allocation and distribution - Arrangement provides for differing allocations/distributions with respect to different services provided by one party or related which are subject to varying levels of entrepreneurial risk - Lack of significant entrepreneurial risk o Most important factor o Arrangement lacking entrepreneurial risk = disguised payment o Arrangement with entrepreneurial risk disguised payment unless other factors establish otherwise 7

8 Partnership Interests as Disguised Payments for Services Presumption of lack of significant entrepreneurial risk - Capped allocations (cap reasonably expected to apply in most years) - Allocation for fixed number of years & service provider s distributive share is reasonably certain - Allocation of gross income - Allocation predominantly fixed in amount, reasonably determinable, or highly likely to be available o Allocation of net profit from a specific transaction or accounting period - Non-binding or untimely waiver Facts & circumstances supporting assertion of significant entrepreneurial risk - Allocation & distributions of cumulative net income Amounts reasonably determinable or highly likely to be available Subject to clawback provision over duration of the partnership and service provider is reasonably expected to comply with obligation 8

9 Partnership Interests as Disguised Payments for Services Under Rev. Proc the issuance of a profits interest to a partner in return for the provision of services to or for the benefit of a partnership is nontaxable unless: - Relates to substantially certain & predictable stream of income from partnership assets - Partnership = PTP - Partner disposes of interest within 2 years of receipt In preamble to Prop. Reg. IRS asserts management company waiver of management fee in exchange for carried interest issued to affiliated GP = taxable event Service provide partner Constructive transfer = deemed sale within 2 years of receipt Preamble to Prop. Reg. also indicates profits interest safe harbor will be modified to exclude profits interest received in conjunction with a partner forgoing payment in an amount that is substantially fixed for the performance of services 9

10 Basket Option Contracts = Reportable Transactions Basket option contract = contract structured as an option entitling investor to receive a return based on the performance of a notional basket of securities - Portfolio of securities is held in account maintained by counterparty - Taxpayer has discretion to change portfolio assets - Stated term > one year - Upfront premium payment = 10%-40% of the value of basket - Cash settlement at termination = based on performance of securities in basket Gain realized = settlement payment > premium - Held > 1 year = long-term capital gain Deemed tax avoidance - Deferral of income - Conversion of ordinary income & short-term capital gain into longterm capital gain 10

11 Basket Option Contracts = Reportable Transactions 2010 IRS memo held basket option contract option - Lacks economic & legal characteristics of an option - Treated basket as an account owned by the investor - derived from assets includable in taxable income as earned - No binding legal authority Senate Finance Committee Report (March 2015) cited continued promotion and use of transaction Notice identified basket option contracts as reportable transaction subject to disclosure (Form 8886) - Contracts in effect or entered into after 01/01/11 - Filing deadline = 01/19/16 Participants advised to take appropriate corrective action - Change in accounting method = automatic consent - Amended returns required for all open years 11

12 2015 Year End Tax Planning Traditional strategies timing of income & deductions - Consider deferral of income and acceleration of deductions if marginal income tax rate is expected to be higher in current year - Consider accelerating income & deferring deductions o Marginal income tax rate expected to be lower in current year o Expiring deduction or credit - Additional considerations o Alternative minimum tax (AMT) o Itemized deduction limitations & phase-outs o Interplay between MAGI & NII Business deduction - year-end bonuses Accrual basis taxpayer deductible if paid on or before March 15 th o Exception = amounts payable to S corp. shareholder must be paid on or before December 31 st Guaranteed payments = included in partner s income in the year in which the partnership claims the deduction 12

13 2015 Year End Tax Planning CAPEX write-offs Bonus depreciation expired 12/31/14 Section 179 deduction o Enhanced write-offs expired 12/31/14 o Canned software & qualified leasehold improvements = no longer eligible o 2015 maximum write-off = $25,000 o 2015 investment limit = $200,000 o Eligibility = based on year in which tax year begins rather than placed-in-service date o Property must be placed in service on or before year-end - De Minimis expensing safe harbor o May elect to expense the cost of property that does not exceed a designated threshold per invoice or item Taxpayers issuing audited financial statements - $5,000 Taxpayer not issuing audited financial statements - $500 o Expensing must be consistent with written accounting procedures applied for both book and tax purposes 13

14 2015 Year End Tax Planning Portfolio rebalancing Fixed income: tax-exempt municipal bonds = more attractive o Higher after-tax yield since interest subject to income tax or NIIT Non-dividend paying growth stocks = more attractive o Deferral o Capital loss offset - Hold less tax-efficient investments in tax-deferred retirement accounts o Dividend paying stocks o Taxable bonds - Gifting of appreciated positions & less tax-efficient investments to family members o 0% capital gain rate o MAGI < threshold 14

15 2015 Year End Tax Planning Harvesting of capital gains & losses - Financial objectives must also be considered - Sell positions on or before December 31 st o Gain on short sale = recognition based on trade date o Loss on short sale = recognition based on settlement date Efficient tax harvesting = intricate process that needs to take into consideration a number of factors o Compute year-to-date realized gains & losses o Rate differential on short-term gain vs. long-term gain Generally preferable to use long-term capital losses to offset short-term capital gains taxed at higher rate Net realized loss - consider recognizing short-term capital gains o AMT rate impact on net short-term capital gain Consider mutual fund capital gain distributions o Anticipated to be higher this year due to higher than normal fund liquidations during market downturns 15

16 Worthless Securities 2015 Year End Tax Planning - Deemed sale for no consideration on last day of tax year in which security becomes worthless - Must be able to establish based on facts and circumstances o Lack of liquidating value (assets < liabilities) o No reasonable expectation of any future value Typically established by occurrence of some identifiable event such as bankruptcy (Chapter 7), cessation of business, liquidation, or receivership - Consider sale to unrelated party for nominal or no consideration 16

17 Wash sale rules 2015 Year End Tax Planning - Deferral of loss if substantially identical securities are purchased 30 days before or after date of sale o Applicable to both long & short positions - Substantially identical o Options & warrants to acquire securities o Sale of a deep in the money put o Convertible securities o Determination for bonds, call options, & put options = more abstract - Must consider each taxable brokerage account as well as IRA accounts 17

18 2015 Year End Tax Planning Strategies to avoid wash sales - Doubling Up: to maintain position purchase additional shares at least 30 days prior to selling original position - Sell original holding & repurchase at least 31 days later o Upside risk - Sell original holding & purchase securities in a different company within the same sector 18

19 Mark Your Calendars Now Changes to Tax Return Due Dates Calendar Year-End Taxpayer Effective Tax Years Beginning After 12/31/15 Current New Law Partnerships Original Due Date April 15 th March 15 th Extended Due Date September 15 th September 15 th S Corporations Original Due Date March 15 th March 15 th Extended Due Date September 15 th September 15 th Trusts & Estates Original Due Date April 15 th April 15 th Extended Due Date September 15 th September 30 th C Corporations Individuals FBAR/FinCIN Report 114 Original Due Date March 15 th April 15 th Extended Due Date September 15 th September 15 th Original Due Date April 15 th April 15 th Extended Due Date October 15 th October 15 th Original Due Date June 30 th April 15 th Extended Due Date N/A October 15 th 19

20 Looking Ahead Tax extenders legislation - Provisions expired at 12/31/14 o Bonus depreciation (50%) o Enhanced Section 179 deduction ($500,000/$2,000,000) o Research & development credit o Work Opportunity Credit o Exclusion of gain on sale of qualified small business stock o Qualified charitable distribution - Senate proposals = 2 year retroactive extension - House of Representative proposals = permanent extension of certain provisions Tax reform o Enhanced Section 179 deduction ($500,000/$2,000,000) o Research & development credit o Qualified charitable distribution 20

21 Looking Ahead Taxation of carried interest - Obama administration s FY16 budget - Carried Interest Fairness Act of Presidential candidate proposals Taxation of financial products - How Tax Pros Make the Code Less Fair and Efficient - Senate Finance Committee Democratic Staff (March 2015) - Identified tax avoidance strategies o Use of collars to avoid capital gains taxes o Using wash sales to time the recognition of capital gains o Use of derivatives to convert ordinary income to capital gains or convert capital loss to ordinary losses o Use of basket options to convert short-term gains into long-term gains Partnership audits continue to be an IRS priority - Bipartisan Budget Agreement of 2015 signed into law included provisions making it easier for IRS to audit large partnerships 21

22 Inflation Adjusted Amounts Retirement Plan Limitations (k) elective deferrals $18,000 $18, (k) catch-up contribution (age 50+) $6,000 $6,000 IRA contributions (traditional & Roth) $5,500 $5,500 IRA catch-up contributions - Age 50+ (traditional & Roth) $1,000 $1,000 Defined contribution plan annual additions $53,000 $53,000 Defined benefit plan annual accrual $210,000 $210,000 Annual compensation limit $265,000 $265,000 22

23 Inflation Adjusted Amounts Miscellaneous Social Security tax wage base $118,500 $118,500 Qualified transportation fringe benefit - parking $250 $255 Qualified transportation fringe benefit transit pass $130 $130 Annual gift tax exclusion $14,000 $14,000 Estate & gift tax unified credit $5,430,000 $5,450,000 23

24 Inflation Adjusted Amounts Standard Deduction Personal Exemption Personal Exemption Phase-out AGI (Beginning) Personal Exemption Phase-out AGI (Complete) Phase-out of Itemized Deductions ( Pease Limitation ) AGI Phase-out of Roth Contribution - MAGI Single Married Filing Joint Married Filing Separate Head of Household 2015 $6,300 $12,600 $6,300 $9, $6,300 $12,600 $6,300 $9, $4,000 $4,000 $4,000 $4, $4,050 $4,050, $4,050 $4, $258,250 $309,900 $154,950 $284, $259,400 $311,300 $155,650 $285, $380,750 $432,400 $216,200 $406, $381,900 $433,800 $216,900 $407, $258,250 $309,900 $154,950 $284, $259,400 $311,300 $155,650 $285, $116,000 $131,000 $117,000 $132,000 $183,000 $193,000 $184,000 $194,000 $0 $10,000 $0 $10,000 $116,000 $131,000 $117,000 $132,000 24

25 Inflation Adjusted Amounts Single Married Filing Joint Married Filing Separate Head of Household Trusts & Estates AMT Exemption AMT Exemption Phase-out (Beginning) AMT Exemption Phase-out (Complete) AMT 28% Rate NIIT (3.8%) MAGI Threshold 2015 $53,600 $83,400 $41,700 $53,600 $23, $53,900 $83,800 $41,900 $53,900 $23, $119,200 $158,900 $79,450 $119,200 $79, $119,700 $159,700 $79,850 $119,700 $79, $333,600 $492,500 $246,250 $333,600 $174, $335,300 $494,900 $247,450 $335,300 $175, $185,400 $185,400 $92,700 $185,400 $185, $186,300 $186,300 $93,150 $186,300 $186, $200,000 $250,000 $125,000 $200,000 $12, $200,000 $250,000 $125,000 $200,000 $12,401 25

26 Federal Tax Rates Single Taxable Ordinary Long-Term Capital Gains & Qualified Dividends Taxable Ordinary Long-Term Capital Gains & Qualified Dividends $0 - $9,225 10% 0% $0 - $9,275 10% 0% $9,226 - $37,450 $37,451 - $90,750 $90,751 - $189,300 $189,301 - $411,500 $411,501 - $413,200 15% 0% 25% 15% 28% 15% 33% 15% 35% 15% $9,276 - $37,650 $37,651- $91,150 $91,151- $190,150 $ 190,151- $413,350 $413,351 - $415,050 15% 0% 25% 15% 28% 15% 33% 15% 35% 15% $413, % 20% $415, % 20% 26

27 Federal Tax Rates Married Filing Joint Taxable Ordinary Long-Term Capital Gains & Qualified Dividends Taxable Ordinary Long-Term Capital Gains & Qualified Dividends $0 - $18,450 10% 0% $0 - $18,500 10% 0% $18,451 - $74,900 $74,901 - $151,200 $151,201 - $230,450 $230,451 - $411,500 $411,501 - $464,850 15% 0% 25% 15% 28% 15% 33% 15% 35% 15% $18,501- $75,300 $75,301 - $151,900 $151,901 - $231,450 $231,451 - $413,350 $413,351 - $466,950 15% 0% 25% 15% 28% 15% 33% 15% 35% 15% $464, % 20% $466, % 20% 27

28 Federal Tax Rates Married Filing Separate Taxable Ordinary Long-Term Capital Gains & Qualified Dividends Taxable Ordinary Long-Term Capital Gains & Qualified Dividends $0 - $9,225 10% 0% $0 - $9,275 10% 0% $9,226 - $37,450 $37,451 - $75,600 $75,601 - $115,225 $115,226 - $205,750 $205,751 - $232,425 15% 0% 25% 15% 28% 15% 33% 15% 35% 15% $9,276 - $37,650 $37,651 - $75,950 $75,951 - $115,725 $115,726 - $206,675 $206,676 - $233,475 15% 0% 25% 15% 28% 15% 33% 15% 35% 15% $232, % 20% $233, % 20% 28

29 Federal Tax Rates Head of Household Taxable Ordinary Long-Term Capital Gains & Qualified Dividends Taxable Ordinary Long-Term Capital Gains & Qualified Dividends $0 - $13,150 10% 0% $0 - $13,250 10% 0% $13,151 - $50,200 $50,201 - $129,600 $129,601 - $209,850 $209,851 - $411,500 $411,501 - $439,000 15% 0% 25% 15% 28% 15% 33% 15% 35% 15% $13,251- $50,400 $50,401 - $130,150 $130,151 - $210,800 $210,801 - $413,350 $413,351 - $441,000 15% 0% 25% 15% 28% 15% 33% 15% 35% 15% $439, % 20% $441, % 20% 29

30 Federal Tax Rates Trusts & Estates Taxable Ordinary Long-Term Capital Gains & Qualified Dividends Taxable Ordinary Long-Term Capital Gains & Qualified Dividends $0 - $2,500 15% 0% $0 - $2,550 15% 0% $2,501 - $5,900 $5,901 - $9,050 $9,051 - $12,300 25% 15% 28% 15% 33% 15% $2,551- $5,950 $5,951 - $9,050 $9,051 - $12,400 25% 15% 28% 15% 33% 15% $12, % 20% $12, % 20% 30

31 Questions? Michael C. Stravin, CPA, MST Member of the Firm Phone:

Investment Advisor Roundtable 2016 Year-End Tax Update November 15, 2016

Investment Advisor Roundtable 2016 Year-End Tax Update November 15, 2016 MEMBER OF PKF NORTH AMERICA, AN ASSOCIATION OF LEGALLY INDEPENDENT FIRMS 2013 Wolf & Company, P.C. Wolf & Company, P.C. Founded