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 1-800-926-7926 x10 (or 404-881-1141 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 emailed 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 1-800-926-7926 x10 (or 404-881-1141 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.
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Tax Reporting and Reconciliation of Hedge Fund and Other Alternative Investment Fund K-1s May 19, 2016 Chad B. Ribault Kaufman Rossin cribault@kaufmanrossin.com Glenn H. Salzman Kaufman Rossin gsalzman@kaufmanrossin.com Casey Gunther Kaufman Rossin cgunther@kaufmanrossin.com
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Tax reporting and reconciliation of Hedge Fund K-1s
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
What is a Hedge Fund? Does hedging have to occur? Differences between other types of funds Qualified Financial Assets & other investments 7
Hedge Fund vs. Mutual Fund Examples of tax differences: Net losses consequences State filings Short term capital gains Accrued dividends 8
9 Hedge Fund Structures
Domestic Partnership Structure Domestic Partnership General Partner Limited Partners Management Company 10
Domestic Partnership s Responsibilities Tax filings Withholding agent responsibilities K-1 disclosures and state forms/vouchers 11
Offshore Corporation Structure Offshore Corporation Management Company Shareholders 12
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
Shareholder of Offshore Corporation PFIC statement Controlled Foreign Corporation Filing Requirement for U. S. Transferors 14
Partner s Responsibilities in Offshore Partnership Form 8865 Schedule K-1 or Pro forma K-1 PFIC elections 15
Master-Feeder Structure Master Fund Domestic Partnership Offshore Corporation (Feeder Fund) General Partner Limited Partners Shareholders Management Company 16
Mini-Master Structure Master Fund General Partner Limited Partners Offshore Corporation Management Company Shareholders 17
Side-by-Side Structure Domestic Partnership Offshore Corporation General Partner Limited Partners Shareholders Management Company 18
Fund of Funds Structure Investee Fund #1 Investee Fund #2 PFIC Domestic Partnership General Partner Limited Partners Management Company 19
3 types of Hedge Fund K-1s 20
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. 1.469-1T(e)(6) - non-passive for purposes of the passive activity rules 21
Investor Fund Holds investment for long-term appreciation Periodic, infrequent trading IRC Sec. 212 deductions Deductible interest expense - Schedule A. Reg Sec. 1.469-1T(e)(6) - non-passive for purposes of the passive activity rules 22
Trader vs. Investor reflected on K-1 Lines Items Cover letter Footnote 23
Fund of Funds Invests in other hedge funds Characterization of income depends on other funds May have entity level trading 24
Analyzing the Schedule K-1 Cover letter Footnotes trader and investor activity Net Investment Income Tax Passive vs Nonpassive 25
26 Trader K-1s
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32 Investor K-1s
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37 Fund of Funds K-1s
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44 Nonpassive vs Passive
45 U.S. Government Obligations
46 PTP K1s
47 PTP K1s
48 Gain/(Loss) on Disposition
49 Deconstructing Line 11F for Trader Funds
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 Installment Sale Footnote
52 Interest Expense Limitation
53 Interest Expense Limitation
54 Interest Expense Limitation
Section 1.1411-10(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 PFICs / 8621 Footnote
57 PFICs Excess Distribution Regime
58 Line 16 Foreign Transactions
59 Line 16 Foreign Transactions
60 Line 16 Foreign Transactions
61 Line 16 Foreign Transactions
62 Line 16 Foreign Transactions
63 Line 16 Foreign Transactions
64 Form 926 Footnote
65 Form 8886 Footnote
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 96,902 142,598 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 157,301 157,301 66
67 Tax Basis Schedule
68 Supplemental
69 Supplemental
70 Supplemental
71 Supplemental
72 Supplemental
73 Supplemental
74 Supplemental
75 Supplemental
76 Supplemental