As 2022 begins to wind down with all the hustle and bustle, a recent webinar “Year-End Tax Planning – Part I” engaged its audience in a discussion about financial planning at the end of the year, general partners (“GPs”) and management companies. The discussion was moderated by:

  • Daniel Krauss, Partner, EisnerAmper;
  • Lindsey Layman, Partner, EisnerAmper; SY
  • Paul Kangail, Director, EisnerAmper.

They discussed topics that hedge fund managers should think about as they harvest year-end losses, including:

  • Wash trade – when a security is sold at a loss and then purchased in large quantities of the same security within 30 days before or after the sale (61 day window), the loss will be deferred for US tax purposes. There are several ways to properly plan for losses that can still be taken:
    • Replacement of loss protection with similar but not identical items;
    • Double up: buy the same number of shares and sell the first block after 31 days; SY
    • Sell ​​securities that have been the subject of wash trades in previous years to relieve losses.
  • Straddles – when someone has an offsetting position in a particular asset. When one leg is sold at a loss, the loss is deferred if the other leg has an unrealized gain. Using a known straddle can control the size of the straddle.
  • Constructive trading – the profit is taxed when a favorable unlisted position is given by another position if the position reduces the potential gains and losses. If you meet the criteria for a closed settlement, the unrealized gain will not be taxed.
  • Short trade – cover shorts at a loss. The short sale must take place before the end of the year to be allowed in 2022.
  • Valueless security – per 165(g), a loss is treated as a sale of securities on the last day of the fiscal year, when the securities have no current or future value. The taxpayer is responsible for that decision.
  • Is the fund a seller or investor in 2022? This is an annual test, so if something has changed significantly from the previous year, the status of the fund may have changed. In a dealer fund, expenses can be used to offset ordinary income, but in an investor fund after the Tax Cut and Jobs Act (“TCJA”), expenses are not available.

Discussions continued on topics related to all fund managers, GPs and management companies, including:

  • Schedules K-2 and K-3 – these forms were introduced in 2021 to replace the previous 16 lines on Schedule K-1. These letters significantly delayed the process of preparing the return from the point of view of cooperation and partners. The draft of the 2022 directive provides narrow restrictions, which require the partnership to issue a partnership letter by January 15 (two months before the due date for the partnership tax return) working), informing the partner that they will not receive a K-3. Therefore, K-2 and K-3 can be placed in more cooperation.
  • State and Local Taxes (“SALT”) – the panel touched briefly on state and local tax issues, including but not limited to the corporate pass-through tax (“PTET”). ).
  • Qualified Small Business Stock (“QSBS”) – provides a benefit of $10 million or 10x the base of the stock. Fund managers should ensure that when QSBS sales and distributions occur, all service providers are aware of and the transaction is disclosed to investors.
  • Section 1061 – The three-year holding period for receiving the permanent income tax rate for carried interest remains in effect.
  • Qualified Opportunity Zone (“QOZ”) savings are investment vehicles that allow taxpayers to defer all or part of their capital gains for federal taxes. This election is available to taxpayers who use their profits from QOZ funds within a period of 180 days from the date of sale. If the eligible benefits are from a pass-through entity, the 180-day period may begin on the due date of the pass-through entity’s tax return without extension. These deferred profits will be included in the taxpayer’s income before December 31, 2026, or the taxpayer’s investment in the QOZ fund. It is important to note that if the QOZ investment is held for ten years, 100% of the investment appreciation is not subject to federal income tax.
  • IRC Sec. 461(l): Limitation on Excess Business Losses – this limits the amount of business/business losses that self-employed taxpayers can use to offset business income during the tax year 2021 to 2028. $540,000 for joint returns) and is applied after other loss limits, including outside basis, loss limits for at-risk and insignificant operations.
  • Bonus Depreciation – new or used property with a useful life of 20 years or less, such as furniture, computers and cars may receive this tax benefit. For the 2022 tax year, 100% of the purchase price of qualified property placed in service is deductible. After 2022, the first-year deduction limit will decrease by 20% each year until the deduction is no longer available after 2026. Taxpayers have until December 31, 2022 to make a worthy purchase that allows them to take advantage of the first year. 100% discount limit.

The webinar can be viewed here.

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