Impact of New Tax Reporting and Ways Fund Managers Can Mitigate Harm of New Partnership Liability Allocation Rules (Part Two of Two)

Fund managers have traditionally been able to allocate resource liabilities to their GP entities in a partnership to offset any incentive allocations they earn over the life of a fund. That practice had been a foundation of the private funds industry, which factored into how funds were structured and tax ramifications were calculated. New tax regulations threaten that approach, however, which could have a significant tax impact on GPs going forward. Those issues and potential solutions fund managers can adopt were explored by a panel at a recent Private Investment Fund Tax and Accounting Forum hosted by Foundation Research Associates, which featured Ahuva Indig, partner at RSM U.S., and James C. Cofer, partner at Seward & Kissel. This second article in a two-part series outlines several ways that fund managers can reduce the negative effect of the new partnership liability allocation rules, while also detailing ambiguities with certain tax reporting requirements. The first article outlined how the allocation rules upend traditional private fund structuring and why it can create significant tax problems for GPs. For additional insights from RSM partners and managers, see “The Effect of 2017 Tax Developments on Advisers to Private Funds: New Partnership Audit Rules, Tax Reform, Blockers, Discounted Gifting, Fee Waivers and State Nexus Issues” (Nov. 30, 2017).

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