2017 Essential Tax and Wealth Planning Guide

2017 Essential Tax and Wealth Planning Guide | Tax implications of fund investing Ω Θ Introduction What is an investment fund? Types of investment funds and income tax characteristics • Marketable securities Hedge funds • Private equity/venture capital Publicly traded partnerships Real estate funds . Fund of funds Investment fund attributes • Trader versus investor . . entities Passive versus non-passive income Separately stated activity (including PTPs) Qualified small business stock (QSBS) Unrelated business taxable income • State tax reporting Conclusion Resources Tax implications of fund investing Types of investment funds and income tax characteristics Publicly traded partnerships (PTP) A publicly traded partnership (PTP) is a partnership that is either traded on an established securities market or readily traded on a secondary market or the substantial equivalent of a secondary market. Partnerships that are publicly traded are classified as corporations for US federal income tax purposes unless at least 90% of the partnership's gross income is from sources commonly considered to be passive or from certain types of businesses historically conducted in partnership form (qualifying income). PTPs that are structured as pass through entities pay no corporate level taxes and owners of a PTP are called unitholders. In order to qualify as a PTP, the fund must satisfy specific income requirements to take advantage of these tax efficiencies. Taxes are not paid at the fund level but are paid by the partners at the partner's individual rate on amounts reported to them by the fund on Schedule K-1. Periodic distributions received from PTP investments are generally not taxed and treated as a return of capital. Note, the term master limited partnership (MLP) is used interchangeably to refer to a PTP, generally in the natural resource industries. An MLP often refers to a tiered limited partnership structure in which operations are conducted by lower-tier partnerships or other subsidiaries (often disregarded for tax purposes) held by the publicly traded MLP. Character of income considerations- publicly traded partnerships PTPs are statutorily required to be separately stated (see page 58 for an additional discussion on separately stated activities). This requirement can be time consuming, which creates additional administrative burden in tax return preparation. In addition, PTPs typically have activities in multiple state jurisdictions. Therefore, it is important to understand any additional state filing obligations that may be created upon making an investment directly in a PTP or indirectly through the use of a partnership. Typically, PTPs can be efficient from a tax perspective because PTPs frequently produce losses (although one needs to consider the impact of the passive activity rules discussed more on page 57) due to accelerated depreciation. Once PTPS are sold, a portion of the gain/loss on disposition is taxable as ordinary income/ loss and a portion is taxable as capital gain/ loss. Also, PTPs commonly make quarterly distributions of operating cash flow, which are typically tax-free as long as there is basis in the investment. It is important to understand any additional state filing obligations that may be created upon making an investment directly in a PTP or indirectly through the use of a partnership. |||| <弓 ☑ |||| A 52

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