FOR LIVE PROGRAM ONLY Tax Reporting and Reconciliation of and Other Alternative Investment Fund K-1s

WEDNESDAY, MAY 16, 2018, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM

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Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection.

If the sound quality is not satisfactory, please e-mail [email protected] immediately so we can address the problem. Tax Reporting and Reconciliation of Hedge Fund and Other Alternative Investment Fund K-1s

WEDNESDAY, MAY 16, 2018

Suzy Lee, CPA, MST, Senior Tax Manager Stacy L. Palmer, CPA, MBA, MST, Principal Untracht Early, Florham Park, N.J. Untracht Early, Florham Park, N.J. [email protected] [email protected]

Laura L. Ross, CPA, Partner EisnerAmper, San Francisco [email protected] Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. TAX REPORTING AND RECONCILIATION OF HEDGE FUND AND OTHER ALTERNATIVE INVESTMENT FUND K-1S

Suzy Lee, CPA, MST Stacy Palmer, CPA, MBA, MST Laura L. Ross, CPA Untracht Early EisnerAmper [email protected] [email protected] [email protected] 415.357.4220 973.805.7255 973.805.7147 What is a Hedge Fund? Deconstructing Hedge Fund K-1s

Presenters:

Suzy Lee, CPA, MST Stacy Palmer, CPA, MBA, MST

untracht.com 6 What is a Hedge Fund?

Suzy Lee, CPA, MST

untracht.com 7 What is a Hedge Fund?

Hedge funds are alternative investments that may use a number of different strategies in order to earn high returns for their investors.

In general, hedge funds use derivatives and leverage their investments in addition to holding the traditional portfolio of stocks, bonds, and cash.

untracht.com 8 History of Hedge Funds

• – first hedge fund in 1949

• 's Tiger Fund

• First stars –, Bruce Kovner

untracht.com 9 Hedge Fund Strategies

Hedge funds use different investment strategies and, thus, are often classified according to investment style.

The following classification of hedge fund styles is a general overview:

• Equity market-neutral • Convertible arbitrage • Fixed-income arbitrage • Distressed securities • Merger arbitrage • Global macro • Emerging markets • Fund of funds

untracht.com 10 How Hedge Funds are Set Up

• Hedge funds are most often set up as private investment limited partnerships that are open to the limited number of accredited investors and require a large initial minimum investment.

• Investments in hedge funds are illiquid as they often require that investors keep their money in the fund for a certain period of time known as the “lock-up period”. Withdrawals may also only happen at certain intervals.

• Generally, they are not registered under the Investment Company Act of 1940.

• In general, hedge funds are largely unregulated because they cater to sophisticated investors.

untracht.com 11 Typical Fees of Hedge Funds

• Management fees – compensation for managing the business of the fund - 2% standard figure

• Incentive fee/allocation – compensation to General Partners for investment advisory services - 20% of gross returns - High Water marks - Hurdle rates

• Withdrawal/Redemption fees Encourage long-term investment

untracht.com 12 Overview of Fund Types – Trader Fund

• Seeks “short swing profits” from trading in securities or commodities • Activity is regular and continuous • Able to make an election under IRC Sec. 475 • Reg Sec. 1.469-1T(e)(6) - non-passive for purposes of the passive activity rules

untracht.com 13 Overview of Fund Types – Investor Fund

• Holds investments for longer-term appreciation • Periodic and less frequent trading • May hold “investments” other than securities and commodities (i.e. private equity) • Investments in stocks and securities generate “Portfolio” income and deductions (not passive for purposes of Sec 469)

untracht.com 14 Overview of Fund Types – Fund of Funds

• Invests in other funds • Characterization of the income and deductions depend on other funds • May have its own entity level trading or investing activity • Diversified portfolio of uncorrelated hedge funds • Typically more accessible to individual investors and are more liquid • Two layers of management fees/ incentive fees • Transparency may be impaired

untracht.com 15 Trader v. Investor

• A trader in securities is engaged in the trade or business of trading securities. All items of income and deduction are treated as trade or business income and deductions for federal income tax purposes AND generally, state income tax purposes.

• An investor in securities is engaged in activity entered into for profit and all items of income and deductions are treated as investment income and deductions for federal income tax purposes and state income tax purposes.

untracht.com 16 When is a Taxpayer Engaged in the Business of Trading Securities?

• There is no definition of trade or business in the IRC • There is no definition in regard to the business of trading in securities in the Federal Income tax regulations • The definition of the business of trading securities has evolved over the last 80 years primarily from case law • While industry professionals often look to portfolio turnover as the litmus test for trader status, there is not one reported decision that describes as a key factor the number of times a securities portfolio turns over during the course of a taxable year • One factor is the manner in which an investment manager describes his investment objective in the private placement offering memorandum • There are no reported cases regarding a partnership’s status as a trader vs. investor

untracht.com 17 IRC Section 475(F) Election – Mark to Market (MTM)

• Traders in securities or commodities were allowed to elect MTM accounting for tax purposes beginning in 1997 (enactment of IRC Section 475(f) • The statute provides that an election once made, is irrevocable without the consent of the IRS Commissioner • At the end of each tax accounting period, taxpayers will MTM all of their securities in their portfolio and include the gain/loss for the entire accounting period plus the MTM gain/loss (there are not any unrealized gains/losses) as ordinary income/loss

untracht.com 18 Deconstructing Hedge Fund K-1s

Stacy Palmer, CPA, MBA, MST

untracht.com 19 Federal K-1s Trader vs. Investor Status

• Comparative Tax Treatment – Trader vs. Investor

• Examples - Investor - Trader – material participation - Trader – no material participation - Fund of Funds

• 3.8% Net Investment Income Tax (NIIT) – IRC §1411

untracht.com 20 Comparative Tax Treatment: Trader vs. Investor

untracht.com 21 Management Fees and Expenses Other than Interest Expense

• Trader – Expenses are deductible under §162 by individual taxpayers "above the line" in arriving at AGI. - Only trader funds can make a §475(f) mark-to-market election (could be just for some activities within the fund).

• Investor – Expenses are §212 investment expenses, treated as miscellaneous itemized deductions. - Subject to 2% of AGI floor limitation and overall AGI-based phase-out of itemized deductions. - Miscellaneous itemized deductions are not allowed for AMT. - Swap expense/loss is treated as a miscellaneous itemized deduction. - Some states limit or do not allow itemized deductions.

untracht.com 22 Management Fees and Expenses Other than Interest Expense

• Fund of Funds • The IRS has ruled that all entity level management fees of a fund of funds are §212 investor expenses (Revenue Ruling 2008-39), treated as miscellaneous itemized deductions subject to the 2% limitation.

• Could have mix of trader expenses depending on investments in underlying funds. - It is the government’s position that a fund of funds is not considered a trader, even if solely invests in trader funds.

untracht.com 23 Interest Expense

• Trader – materially participates – fully deductible as a non-passive trade or business interest expense on Schedule E, not subject to investment income limitations.

• Trader – doesn't materially participate – subject to the investment income limitation, to the extent deductible, treated as non-passive trade or business interest expense on Schedule E, ordinary deduction.

• Investor – subject to the investment income limitation, to the extent deductible - report on Schedule A as an itemized deduction.

• Fund of Funds – typically will be mix of investor and trader treatment. - If fund of funds uses leverage to invest, the interest tracing rules would apply in determining treatment of interest expense.

untracht.com 24 Interest Expense

Example of Trader Footnote (not materially participating)

• "Interest expense has been included in Box 13H as investment interest expense and is not included in Box 11F. 1040 filer should enter this amount on Form 4952, Line 1. Any deductible interest expense should then be entered on Schedule E, Part II, Column (H).”

untracht.com 25 K-1 Tips

• If trader fund - ask client about level of involvement in investment.

• Read the K-1 and supporting statements/footnotes carefully!

untracht.com 26 Investor K-1s

General Characteristics

• Investment management fees and entity level expenses will be 2% miscellaneous itemized portfolio deductions in Box 13K – BIGGEST CLUE!

• Investment interest expense reported in Box 13H will be subject to investment income limitations and be a Schedule A itemized deduction.

• The boxes on the face of the K-1, from Box 1 through to the end, will be completed, where applicable. In general, usually contains less footnotes (less specific treatment).

untracht.com 27 Trader K-1s

General Characteristics • Management fees will be a nonpassive ordinary business expense.

• Investment interest expense may or may not be subject to investment income limitations depending on material participation and will be a Schedule E nonpassive expense.

• Boxes 11F and 13W will be supported by footnote details and Box 11F may include capital gains/(losses) depending on the Firm preparing the K-1.

Clues in Identifying Possible Trader K-1 in Footnotes • "Please note that none of the distributive share items reported on Schedule K-1 are considered as derived from a passive activity under Treasury Regulation Section 1.469-1T(e)(6).”

• "The K-1 has been prepared on the basis of a partner who does not materially participate in the operations of the partnership."

untracht.com 28 Trader K-1s

• Entity level expenses are reflected under Box 13W.

• If you see 475(f) income under Box 11F (can only make if trader fund). Could either be trader fund or be invested in a K-1 that has trader fund activity.

• Footnote stating investment interest should go to Schedule E.

• Should always ask client about their level of participation!

untracht.com 29 Fund Of Funds K-1s

General Characteristics

• In the view of the IRS, management fees charged by the fund of funds are always subject to the 2% AGI limitation, however, the character of expenses flowing through from underlying investments will depend on whether those investments are trader or investor funds.

• Investment interest expense will be subject to investment income limitations and may be a mix of nonpassive Schedule E or Schedule A expense.

• The boxes on the face of the K-1, from Line 1 through to the end, will be completed, where applicable, and lines 11F and/or 13W will have supporting statements.

• Character of income and expenses is preserved for all underlying investments.

untracht.com 30 Fund of Funds K-1s

• Potential combination of entity level expenses reflected as 2% deductions under Box 13K and deductions under Box 13W, if invested in trader funds.

• Footnote where investment interest is allocated to both Schedule A and Schedule E (if invested in trader funds).

• Frequently has items of income and capital gains on face of K-1 and Box 11F (mix of trader and investor).

untracht.com 31 Comparative Tax Treatment of Trader vs. Investor

Status affects deductibility of portfolio expense and eligibility of making Section 475(f) election as follows:

Trader Investor Section 162(a) expenses Section 212 expenses - subject to 2% AGI

No interest expenses limitation for partners who Interest expense limitation under Section 163(d) – Reported materially participate in the trading activity – on Schedule A as itemized deduction Reported directly on Schedule E as non-passive deduction Swap expense is not subject to 2% AGI Swap expenses bifurcated from swap income and such expense is treated as a miscellaneous itemized deduction

Expenses reduce Alternative Minimum Taxable Expenses do not reduce Alternative Minimum Taxable Income Income (“AMTI”) (“AMTI”)

Section 475(f) election No Section 475(f) election

untracht.com 32 3.8% Net Investment Income Tax (NIIT) - §1411

untracht.com 33 3.8% Net Investment Income Tax (NIIT) - §1411

• §1411(c)(1)(A)(i) - "Net investment income means the excess of the sum of gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business not described in paragraph 2.“

• §1411(c)(2)(B) – Trades and businesses to which tax applies - "A trade or business of trading in financial instruments or commodities (as defined in section 475(e)(2).”

Bottom Line • Net income from trader funds is subject to NIIT regardless of whether or not there is material participation as the fund is a specified trade or business per the code. • Income from investor funds and fund of funds are subject to NIIT.

untracht.com 34 K-1 Examples

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41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 Footnote Reporting

In alternative investments, footnotes to the federal K-1 provide information that may have tax implications for different types of investors.

US Treasury Interest Interest on US Treasury obligations is exempt for individuals for state purposes but is taxable for federal income tax purposes. The income will be included in Box 5 but a footnote will provide the amount (a state K-1, if provided, should also report this in some manner).

untracht.com 61 Footnote Reporting - Example

BOX 5 - INTEREST INCOME

U.S. GOVERNMENT INTEREST INCOME OTHER INTEREST INCOME ______TOTAL INTEREST INCOME ______

untracht.com 62 Footnote Reporting

Muni Interest Interest on Municipal obligations is not taxable for federal purposes and should be included in Box 18 Code A. However, states do not tax individual taxpayers on interest of their resident states (and US instrumentalities). A footnote will provide the states from which the fund has earned the Muni interest and provide either amounts or percentages.

untracht.com 63 Footnote Reporting - Example

BOX 18, CODE A - TAX-EXEMPT INTEREST INCOME

FOLLOWING STATES: CONNECTICUT NEW YORK ______TOTAL TAX-EXEMPT INTEREST ______

untracht.com 64 Footnote Reporting

Expenses related to US Treasury Interest or Muni Interest For states that calculate tax on a “net income basis”, expenses (interest expense or other expenses) directly or calculated as “indirectly” related to the income will be reported in a footnote and the Box on the federal K-1 where the expenses are included. (State K-1s, if provided, may report these items in various ways either columnar or as additions/modifications.)

untracht.com 65

Differences Between Book and Tax Income on Hedge Fund K-1s & Changes Related to the Tax Cuts & Jobs Act

Presenter:

Laura L. Ross, CPA

67 Section L of Schedule K-1

• Items noted in Section L are usually presented on a GAAP basis ― Section L items ― Capital accounts ― Increases/decreases ― Contributions and distributions • The underlying financials and investor statements of a hedge fund are also stated on GAAP

68 Components of GAAP Income

• Ordinary income items on accrual basis • Capital items marked to FMV • Expense items on an accrual basis • All future costs of liquidating funds

69 Differences Between Tax and GAAP

• Amortization periods of organization costs (15 years vs 1 year) • Dividend Accruals • OID • Accrued accounting fees that have not been billed • Other Differences?

70 Adjustments to Tax Items and GAAP Differences

• Change in unrealized gains on securities • Wash sales • Worthless Shorts • Constructive sales • Straddles

71 K-1 Income Allocations: Capital Gains

• Several different methodologies can be used to allocate capital gains in an investment partnership. The most common methods are described in the Regulations for IRC Section 704(c), and are known as full-netting and partial- netting. Another method that can be used is known as layering, which tends to be cumbersome and is not used as often in this environment.

72 Example – Typical Book Allocation

500 200 19,000 (1,500) (2,500) Book Interest Other Total Own % Interest Dividends Gain Expense Expenses Partner income

GP 0.1 50 20 1,900 (150) (250) 1,570 LP1 0.3 150 60 5,700 (450) (750) 4,710 LP2 0.2 100 40 3,800 (300) (500) 3,140 LP3 0.4 200 80 7,600 (600) (1,000) 6,280

Total Income 500 200 19,000 (1,500) (2,500) 15,700

Sometimes an administrator will present book gain into two components, realized and unrealized gain. This presentation is not an accurate reflection of the starting tax allocation, and should be avoided.

73 Aggregate Method Qualities

• Not allocated by security • Susceptible to subjectivity ― Timing of allocations ― Impact of the incentive allocation ― Timing of tax adjustments • Qualifications for use

74 K-1 Income Allocations: Full-Netting

A and B form a partnership with each contributing $100,000. The partnership Tax Unrealized Book buys two stocks. During the course of Basis Gain Basis the year those stocks go up in value so A 100,000 25,000 125,000 that each partner has a book capital B 100,000 25,000 125,000 account of $125,000. 200,000 50,000 250,000

Original Increase FMV of Investment in Value Investment NOK 100,000 20,000 120,000 SGP 100,000 30,000 130,000 200,000 50,000 250,000

75 K-1 Income Allocations: Full-Netting

Partner C enters in the next period, and contributes $125,000, so all three partners Tax Unrealized Book have the same book capital accounts. Basis Gain Basis Additional stock is purchased, and book A 100,000 35,000 135,000 value goes up another $30,000. B 100,000 35,000 135,000 C 125,000 10,000 135,000 325,000 80,000 405,000

Original Increase FMV of Investment in Value Investment NOK 100,000 20,000 120,000 SGP 100,000 30,000 130,000 IBM 125,000 30,000 155,000 325,000 80,000 405,000

76 K-1 Income Allocations: Full-Netting

The partners decide to sell SGP at this point, which has an unrealized gain of Tax Unrealized Book $30,000 – when sold this becomes Basis Gain Basis taxable income. What is the most A 100,000 35,000 135,000 logical way to allocate the $30,000 gain B 100,000 35,000 135,000 C 125,000 10,000 135,000 among the three partners? 325,000 80,000 405,000

Original Increase FMV of Investment in Value Investment NOK 100,000 20,000 120,000 SGP 100,000 30,000 130,000 IBM 125,000 30,000 155,000 325,000 80,000 405,000

77 K-1 Income Allocations: Full-Netting

The most logical way to allocate the gain is by the amounts of unrealized gain each partner has. This is the Unrealized Realized Remaining basis of the full-netting concept, and Gain Gain Unrealized it is identified in Regulation 1.704-3. A 35,000 13,125 21,875 B 35,000 13,125 21,875 C 10,000 3,750 6,250 80,000 30,000 50,000

78 K-1 Income Allocations: Partial-Netting

Partial-netting is very similar to full-netting. The difference is the Tax Unrealized Book gains and losses are allocated separately. This method may Basis Gain Basis reduce disparities faster than full- A 100,000 30,000 130,000 netting can. B 100,000 30,000 130,000 C 125,000 5,000 130,000 D 135,000 (5,000) 130,000 460,000 60,000 520,000

79 K-1 Income Allocations: Partial Netting

Assume we are allocating $30,000 in Unrealized Allocation Remaining realized gains again, but that amount is Gain Unrealized composed of $34,000 of gain and $4,000 of A 30,000 15,692 14,308 loss. Loss is first allocated to the partner B 30,000 15,692 14,308 with unrealized losses, gains are allocated C 5,000 2,616 2,384 to the partners with unrealized gains. D (5,000) (4,000) (1,000) 60,000 30,000 30,000

80 K-1 Income Allocations: Layering

Layering is the most precise method, but also the most cumbersome. The periodic appreciation or depreciation of each stock tax lot must be tracked simultaneously with each partner’s ownership percentage for each period. When the stocks are sold, each partner receives their exact portion of appreciation or depreciation for each stock.

This method is not commonly used due to the amount of record keeping necessary.

81 Wash Sales Overview – Section 1091

• A wash sale occurs when ― A loss is sustained upon the sale or disposition of stock or securities, ― And “substantially identical” stock or securities are acquired either 30 days before or 30 days after the date of sale (the 61-day window). ― Or a contract or option to acquire substantially identical stock or securities is purchased • Treated “as though” you just held the original securities

82 Purpose of the Wash Sale Rules

• To prevent taxpayers from artificially recognizing tax losses while maintaining their holdings in the stock or securities sold.

83 Tax Consequences of Wash Sales

• Pursuant to Section 1091(a), the loss is not allowed to be recognized at the time of the sale. • Pursuant to Section 1091(d), the disallowed wash sale loss is added to the basis of the substantially identical stock or securities, the purchase of which resulted in the wash sale. • Holding Period of Replacement Stock or Securities — The holding period, under Section 1223(3), includes the holding period of the stock or securities that was disposed of at a loss. In other words, the holding period is “tacked on.”

84 Constructive Sales Overview – Section 1259

• A Constructive Sale occurs when: ― A taxpayer holds an “appreciated” position in a security ― And acquires an “opposite” position in the same or substantially identical security. • Treated as though you sold the appreciated securities on that date, and bought them right back.

85 Purpose of the Constructive Sale Rule

• To prevent taxpayers from reducing their exposure to the stock or securities while artificially deferring the recognition of tax gains.

86 Constructive Sales Rules

• Treated as if the original position were actually sold. ― Recognizes gain only. ― Does not apply to losses. ― End old holding period and start new holding period as of constructive sale date for original position. Therefore when you sell the original position, the date of the constructive sale is deemed to be the date on which the position was acquired. • Non-Convertible Debt Instruments are exempt from the Constructive Sale Rule

87 Changes Related to the Tax Cuts and Jobs Act

• Impact to General Partner ― 3 year look-through rule for long-term capital gains received from carried interest. ― No guidance available yet on implementation ― Initial language that would have made S-Corps exempt from the rule has been overridden by new guidance • General Partners with lower management income may be able to get some advantage from the new qualified business income pass-through deduction ― In general, this deduction is not available for those who provide investment advice, but there is an exception for lower income amounts.

88 Changes Related to Tax Cuts and Jobs Act – Pass-Through Entity Deduction

• Starting 2018 tax year, taxpayers who have domestic “qualified business income” (QBI) from a partnership, S Corporation, or sole proprietorship are entitled to deduction of the lesser of such QBI or 20% of taxable income over the net capital gain. • The deduction reduces taxable income, not adjusted gross income at the individual level. • The 20% deduction is also allowed for a taxpayer’s qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income. • QBI is net amount of qualified income, gain, deduction, and loss with respect to any qualified trade or business (i.e. US effectively connected income) of the taxpayer. It includes income other than investment income (e.g. dividends, investment interest income, short-term capital gains, long-term capital gains, commodities gains, foreign currency gains, etc.) • QBI is limited to the lesser of i) 20% of the taxpayer’s QBI or ii) the greater of 50% of the W-2 gages with respect to the qualified trade or business or the sum of 25% of the W-2 wages plus 2.5 % of the unadjusted basis of all qualified property

89 Pass-Through Entity Deduction

• The deduction expires after December 31, 2025 • Taxpayers with pass-through income from specified service businesses in the fields of health, law, accounting, consulting, financial services, and brokerage services are not eligible for the deduction. • Neither “W-2 wage” limit nor the prohibition on specified services businesses applies to a taxpayer with taxable income not exceeding $157,500 ($315,000 in the case of a join return). • These limitations are fully phased in for a taxpayer with taxable income in excess of the threshold amount plus $50,000 ($100,000 in the case of a join return). • The calculation of the pass-through entity deduction and related wage and capital limitation is done for each trade or business. If a taxpayer has multiple interests in pass-through entities and each pass-through entity is in a qualified trade or business, such taxpayer will need to keep track of the trade or business income separately.

90 Pass-Through Entity Deduction

91 Changes Related to Tax Cuts and Jos Act - Limitation on Losses from Partnerships

• Starting 2018 tax year, excess business loss of a taxpayer of a partnership will be limited. • An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer attributable to trades or business of the taxpayer, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount ($500,000 for married taxpayers filing jointly; $250,000 for all other taxpayers (indexed for inflation)). • Limitation at the partner level. • The excess business loss is treated as part of the taxpayer’s net operating loss (NOL) carryover to the following year (subject to 80% of taxable income limitation). The limitation applies at the partner level. • The limitation expires after December 31, 2025.

92 Changes Related to Tax Cuts and Jobs Act - Sales of Partnership interest with ECI

• Rev. Rul. 91-32 re-established gain or loss from the sale of an effectively connected income (ECI) partnership interest by a foreign partner is treated as ECI. • Applies to sales or exchanges on or after November 27, 2017. • 10% withholding on sale of non-publicly traded partnership. 10% withholding on sale of PTP is suspended for now (Notice 2018-8) but not for non-PTP. • Purchaser or transferee must withhold 10% of the realized on the disposition absent certificate from seller. (i.e. If the transferor furnishes to the transferee its US ID and an affidavit certifying that it is not a foreign person signed under penalties of perjury, withholding is not required.)

93 Changes Related to the Tax Cuts and Jobs Act

• Impact to Funds – Investor Funds ― 2% Deductions ― 2% deductions are no longer deductible as of 2019. Management fees and accounting and legal expenses will not longer be deductible by partners of the fund, which will significantly decrease effective return. ― In light of this change, there will be increased pressure to qualify as a trader fund.

94 Changes Related to the Tax Cuts and Jobs Act

• Impact to Funds – Trader Funds ― Interest Expense Deduction ― Interest expense deduction will be limited in a given year to business interest income plus 30% of “adjusted taxable income” which will be determined by a formula based upon EBIT. ― Leveraged funds could find interest expense not deductible in certain years ― Does not apply to businesses with gross receipts of less than $25 million

95 QUESTIONS?

Suzy Lee, CPA, MST Laura L. Ross, CPA Stacy Palmer, CPA, MBA, MST EisnerAmper Untracht Early [email protected] [email protected] 415.357.4220 [email protected] 973.805.7255 973.805.7147

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