Accounting

Tax Court says fund partners must pay self-employment tax

Published

17 hours ago

January 14, 2025

Registered investment advisory firms that actively manage a private fund as limited partners must pay Uncle Sam for self-employment taxes on their profits, according to a court decision.

The Tax Court ruling last month in Denham Capital Management LP v. Commissioner will face a challenge in the Fifth Circuit Court of Appeals. In the meantime, the principals of RIAs or other advisory practices that also manage private funds should review the decision to see how it affects any possible taxes on their distribution of profits, according to Brett Cotler, a partner in the Taxation Group of law firm Seward & Kissel. An exclusion had previously shielded limited partners from taxes on their distributed shares in the form of net earnings from self-employment.

“The tax savings were definitely one reason why fund managers would structure their businesses — and wealth managers, too — as an LP structure,” Cotler said in an interview. “If it’s not the final nail in the coffin, we’re pretty close to it. … We’re thinking of a couple ideas that potentially would retain these tax savings for clients, but we’re still thinking through the pros and cons of those.”

At the end of 2023, at least 5,560 RIAs that were registered with the Securities and Exchange Commission managed private funds — or 36% of the total count, according to the annual industry snapshot from the Investment Adviser Association and compliance firm COMPLY.

Over a third of those firms that manage private funds do so as their exclusive form of business, but many of the rest are retail-focused RIAs that operate their own investment vehicles. Larger RIAs are especially likely to do so: 71% of firms with at least $100 billion in client assets, 67% of those with $5 billion to $100 billion and 54% with $1 billion to $5 billion manage hedge funds, private equity vehicles or investments focused on areas such as venture capital, real estate or other securitized assets. Some smaller RIAs operate specialized “exempt-reporting” vehicles that don’t need to register as private funds, the snapshot noted.

RIAs had been bracing for a series of private fund reforms under an SEC rule adopted in 2023, but a court decision last year vacated the regulation entirely after industry pushback.

“Over the past 10 years, the number of advisors offering private funds, the number of private funds and the assets in private funds have grown consistently,” last year’s snapshot said.

In the Tax Court case, a limited liability corporation that was the general partner and five limited partners who were owners of the investment manager received guaranteed payments and other distributions out of the profits generated by the fees from the private funds. The judge applied a test known as a “functional analysis” to decide whether the exclusion for limited partners from self-employment taxes applied to the distribution. In essence, the determination revolves around the question of whether the limited partners more closely resemble passive investors or employees, according to an analysis of the decision by Seward & Kissel.

The limited partners got “reasonable compensation” as part of a base salary separate from the profit payments that was far lower than the pay of other employees of the fund company, the judge ruled.

“The Tax Court found that each of the limited partners were actively involved in the activities conducted by the investment manager, were held out as active partners in audited financial statements and prospectuses, devoted substantially all of their working time to the investment manager and actively directed and strategically guided the investment manager,” according to the law firm’s analysis of the decision.

“This opinion is the second Tax Court decision holding that a limited partner under state law who is actively involved in an investment manager’s business activities is subject to self-employment tax, notwithstanding the statutory language of the limited partner exception,” the analysis continued. “It has been publicly reported that one taxpayer is appealing the holding of an earlier Tax Court case on this issue to the Fifth Circuit Court of Appeals. The decision by the Fifth Circuit will provide more clarity on the ultimate application of the self-employment tax to limited partners. Management companies that are structured as limited partnerships should consider the application of these recent Tax Court decisions for the current and future taxable years.”

The exemption from self-employment taxes usually works out to savings of about 4% off the total hit — a number that sounds small but gets much bigger “when you multiply it out” over millions of dollars in annual profit over several years, Cotler noted. RIA owners who manage private funds should speak to their certified public accountant or another tax professional to assess the potential impact of the ruling on their 2024 taxes and moving forward, he said.

“The tax effectively puts the owner in more or less the same position as the employee who’s subject to W-2 wage withholding,” Cotler said. “I do anticipate there will be some reactions within the industry in terms of ways to restructure.”

Accounting

Tax pros brace for 2026: Trump, TCJA extensions and crypto

Published

1 hour ago

January 15, 2025

Business Finance News

Enjoy complimentary access to top ideas and insights — selected by our editors.

The Internal Revenue Service ended 2024 by debuting regulations on reporting cryptocurrency transactions, amendments for outdated provisions, updates for standard mileage rates and more. And as President-elect Donald Trump gets ready for his second term in office, professionals are looking ahead to what the 2026 tax landscape will look like.

Trump was vocal throughout his campaign about working to extend many of the provisions of his landmark Tax Cuts and Jobs Act of 2017 that are set to expire at the end of this year. Recently, he rallied roughly 20 likeminded Republican House members from New York, New Jersey and California to discuss updates to state and local tax deduction caps.

Representative Nick LaLota, R-N.Y., said in an interview with Bloomberg that he and a small group of four other representatives are working to push forward a bill to “reasonably adjust” the current $10,000 cap on SALT deductions.

“There are five very salty Republicans — I would expect that somebody in his position would appreciate that dynamic and would want to provide an accommodation to get the bill passed,” he said. “The five of us have the opportunity to effectuate an even more beautiful, big bill.”

Most of the current regulations will be in place for the majority of the 2025 tax season, with the steadily gaining pace of regulatory proposals making planning ahead for 2026 one of the key priorities for tax professionals.

Randy Hughes, CEO of Atlanta-based Counting Pennies and co-founder of Seven Figure Profits, said in an interview with Accounting Today that Trump’s return is a likely signal that the current tax landscape would be renewed into next year with some additional provisions.

“The most significant changes include potential new regulations around cryptocurrency transactions, increased IRS scrutiny on high earners and adjustments to clean energy credits,” Hughes said. “Most changes will not be changes to tax law, but the implementation of laws that are already in place … so being familiar with this implementation is important.”

Learn more about the IRS’s new rules on crypto reporting, accounting methodology changes and more below.

New rules from IRS on DeFi tax reporting cross the finish line

The IRS released final regulations in December for decentralized finance brokers to report sales and exchanges of digital assets on the Form 1099-DA, as well as relief measures to ease the changes.

The new requirements take effect for DeFi companies starting Jan. 1, 2027, after responses gathered in the initial stages of the regulations led the IRS and the Treasury to push back the deadline by two years. Individual cryptocurrency brokers, traders, banks and more are subject to the updated rules as of Jan. 1.

“Although the applicability date proposed by the proposed regulations applied to gross proceeds reporting for sales of digital assets effected on or after Jan. 1, 2025, the Treasury Department and the IRS agree that a delay is warranted for trading frontend service providers treated as brokers (DeFi brokers) under these final regulations,” the regulation states.

New crypto rules from IRS will create an information avalanche

Following the Jan.1 effective date of the IRS’s new 1099-DA and finalized regulations for reporting decentralized finance transactions, accountants across the profession worry that many brokers and taxpayers will struggle to quickly adapt to the changes.

“The fact that the IRS is now going to get information about the transactions, and how inaccurate the information will be, is really underappreciated at this point,” James Creech, a director in the tax advocacy and controversy practice of Top 10 Firm Baker Tilly, said in an interview with Accounting Today’s Roger Russell. “There will be a lot of people who will realize, too late, that this has taken effect.”

He further mentioned that the utility of the information gathered through Form 1099-DA reportings will vary in accuracy for the first few years as all eligible parties become familiar with the requirements and standards.

IRS expands waiver of eligibility for accounting method changes

The IRS’s newly debuted Revenue Procedure 2025-08 expanded the waiver of eligibility rules that allow for changes in accounting methodology where research or experimental expenses are concerned.

Expanded rules include those in Section 5.01(1)(d) and (f) of Rev. Proc. 2015-13 to accounting method changes described in Section 7.01 of Rev. Proc. 2024-23 that are made for any taxable year beginning in 2022, 2023 or 2024.

IRS proposal seeks to add tech competency for tax professionals

Last month, the IRS and Treasury Department released jointly proposed regulations that would seek to introduce a technological competency requirement for preparers and revise many parts of Circular 230 “to account for changes in the law and the evolving nature of tax practice.”

The proposed changes are limited to affect only those who practice before the IRS, and include the following updates, among others:

Eliminating provisions related to registered tax preparers;
Classifying the use of certain contingent fee arrangements by practitioners as disreputable conduct;
Establishing new standards for appraisals and the disqualification of appraisers; and
Providing rules related to appraisers, including the standards for disqualification.

IRS increases standard mileage rate for 2025

The tax service increased its optional standard mileage rate for 2025 by three cents for vehicles driven for business purposes, while other rates remain unchanged since last year.

The rates applicable to cars, vans, pickups or panel trucks, including fully electric and hybrid vehicles, are as follow s:

70 cents per mile driven for business use, up three cents from 2024;
21 cents per mile driven for medical purposes, the same as in 2024;
21 cents per mile driven for moving purposes for qualified active-duty members of the Armed Forces, unchanged from last year; and,
14 cents per mile driven in service of charitable organizations, equal to the rate in 2024.

Accounting

In the blogs: Buzzing sounds

Published

10 hours ago

January 14, 2025

Business Finance News

Flat tax; doubts about “automatic” IRS calculations; when to shred; and other highlights from our favorite tax bloggers.

Buzzing sounds

Tax Foundation (https://taxfoundation.org/blog): From July 2021 to September 2022, five states enacted laws to transform graduated-rate income taxes into single-rate tax structures. Where things stand with the states’ flat tax revolution.
Institute on Taxation and Economic Policy (https://itep.org/category/blog/): Legislatures countrywide are resolved to write new tax policy, and debates are heating up. But states’ fiscal situations vary dramatically.
Tax Vox (https://www.taxpolicycenter.org/taxvox): Washington is abuzz over whether Congress will address Trump’s ambitious policy agenda in one bill or two. But lawmakers must confront a more important question.
Global Taxes (https://www.globaltaxes.com/blog.php): In Case You Missed It Dept.: A circuit court has flip-flopped (again) on beneficial ownership reporting, and now the Supreme Court’s involved.
Current Federal Tax Developments (https://www.currentfederaltaxdevelopments.com/): An overview of new final regs that identify certain micro-captive transactions as listed transactions and transactions of interest.
CLA (https://www.claconnect.com/en/resources?pageNum=0): A look at the new draft Form 7217, “Partner’s Report of Property Distributed by a Partnership,” to collect information such as a partnership’s basis in a property before distribution, the fair market value of the distributed property and any basis adjustments that may apply — all of which promise “a more pronounced impact on real estate partnerships.”
Tax Notes (https://www.taxnotes.com/procedurally-taxing): Final regs on the oft-litigated Sec. 6751 “supervisory approval” leave longtime questions unanswered. Among them: What exactly happens when a penalty is “automatically calculated through electronic means?”

Shore things

Virginia – U.S. Tax Talk (https://us-tax.org/about-this-us-tax-blog/): Long-awaited and at last final Sec. 2801 regs — concerning gifts and bequests received by a U.S. person from certain foreign persons — resemble proposed regulations issued 10 years ago (and 17 years since Sec. 2801 was enacted). “In a nutshell,” a U.S. recipient may have to file a Form 708 (not yet available).
Armanino (https://www.armanino.com/articles/): How tax credits and incentives are among the details biz clients should keep in mind as they consider nearshoring, offshoring and reshoring.

Tough questions

MBK (https://www.mbkcpa.com/insights): What to remind biz clients about the Tax Cuts and Jobs Act’s Sec. 163(j), which generally limits deductions of business interest to 30% of a company’s adjusted taxable income.
The National Association of Tax Professionals (https://blog.natptax.com/): This week’s “You Make the Call” looks at Jason, who gambles at the local casino. He is not considered to be in the trade or business of gambling but does spend a large amount of money at one casino, which gives him perks that total $2,500. During the year, Jason’s gambling pursuits have resulted in gambling winnings of $10,000, which he will report on his 1040. He also keeps a log of all his wagers and has allowable documented gambling losses of $20,000. Assuming Jason can itemize on Schedule A, what amount of gambling losses can he deduct?
Gordon Law (https://gordonlawltd.com/blog/): What to remind them about who needs to file a FBAR.
Summing It Up (http://blog.freedmaxick.com/summing-it-up): Nonprofits seem especially vulnerable to theft (what they may comparatively lack in juicy resources from a thief’s perspective they often make up for in a lack of security). A look at common types of theft in nonprofits, as well as security measures they can take.
Palm Beach Accounting and Financial Services (https://www.pbafs.com/blog): Why do I exist? What is love? And for most of us, the real toughie: When can we shred our financial documents?
Taxjar (https://www.taxjar.com/resources/blog): A question on your ecommerce clients’ minds, whether they admit it or not: Should you invest in sales tax software or hire a tax professional?

Consider it a warning

Sovos (https://sovos.com/blog/): IRS due dates for 2024 information returns. (Largely unchanged from last year, though tweaked for weekends).
Canopy (https://www.getcanopy.com/blog): In a recent podcast, Dr. Jackie Meyer, CPA, entrepreneur and author of “The Balance Sheet of Life Formula,” “shares her journey as she goes from a traditional accountant to pioneering innovative approaches in the field.” She also discusses the challenges of postpartum depression and chronic fatigue.
Wolters Kluwer (https://www.wolterskluwer.com/en/solutions/tax-accounting-us/industry-news): How secure is the cloud?
Sikich (https://www.sikich.com/insights/): Artificial intelligence may be changing how marketers produce content, but where does content marketing go in 2025? Two challenges B2B brands must overcome.
Taxable Talk (http://www.taxabletalk.com/): New Jersey recently asked a client to send additional tax documents; one method suggested was email. “Is New Jersey aware of the risks of identity theft by emailing documents? Is the Division of Taxation aware of their own guidance on this?”
TaxProf Blog (http://taxprof.typepad.com/taxprof_blog/): Congratulations to Ellen Aprill and Beverly Moran, recent recipients of Association of American Law Schools Tax Section Lifetime Achievement Award.

Accounting

M&A roundup: KSM and KDG expand

Published

13 hours ago

January 14, 2025

Business Finance News

Noble Consulting Services Inc., a wholly owned subsidiary of Katz, Sapper & Miller, a Top 50 Firm based in Indianapolis, said Tuesday that Rector & Associates, an insurance regulatory firm based in Columbus, Ohio, has joined its practice, effective Jan. 1, 2025.

Mark Alberts, founder of Alberts Actuarial Consulting LLC, has also joined Noble as a vice president to expand Noble’s actuarial services. With the addition of Rector & Associates and Alberts, Noble plans to introduce additional services.

Rector offers transactional, financial, and compliance services for insurance companies, litigation support and expert witness services, regulatory compliance for insurance brokers and agents, and more. Alberts will lead development of an in-house actuarial department at Noble, which will provide financial examination, actuarial analysis, and form and rate review services to regulatory clients, valuation and appointed actuary services to insurers, and more.

Rector & Associates was founded in 1991 and provides insurance regulation and financial solvency consulting. Sarah Schroeder and Ed Dinkel of Rector are joining Noble as managing directors. Neil Rector, who founded Rector & Associates and is a former deputy director of the Ohio Department of Insurance, will provide ongoing consultation services to Noble.

Alberts has provided actuarial consulting services in the life insurance, annuity and supplemental health practice areas since 2008. He and his team of actuaries have worked with Noble on a contract basis for many years.

“We’re thrilled to welcome Sarah, Ed, Neil, and Mark to the Noble team,” said Noble CEO Mike Dinius in a statement. “Their exceptional expertise and client-focused approach are a perfect fit for Noble as we expand our services. Adding an in-house actuarial department is a major step, allowing us to deliver broader, more impactful services to both regulators and insurance companies. This move strengthens our ability to meet the evolving needs of our clients and ensures we remain at the forefront of the industry.”

Financial terms of the deal were not disclosed, and Noble’s revenue figures were not disclosed either.

KSM ranked No. 49 on Accounting Today‘s 2024 list of the Top 100 Firms, with $144.8 million in annual revenue. Noble employs 70 people. The combination with Rector adds two full-time people — Schroeder and Dinkel — and two contractors, including founder Neil Rector.

KSM acquired Noble in 2021, and it operates as a wholly owned subsidiary. The addition of Rector & Associates and Mark Alberts continues Noble’s growth following integration of the insurance regulatory practices of Johnson Lambert LLP and Eide Bailly LLP in 2023.