Asset Management Tax Savings and Tax Considerations

Published: Apr 19, 2016
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By the time this issue goes into publication, for many, a New Year’s resolution will have been made, broken or forgotten. Tax regulations, however, as much as we would wish, do not work the same way. As we gear up for another tax filing season, there are some noteworthy items to highlight. We have published alerts or articles on these topics during the past year and links are provided if you need a refresher on the details.

New York Changes the Definition of Investment Capital

2015 was a year for states to assert themselves; particularly New York and California, two of the highest income tax states in the nation. Late September saw a flurry of activity as funds busied to identify the assets in their portfolios for investment to meet New York’s new investment capital definition for corporate tax purposes. Why does this affect funds that are generally partnerships? Because any corporation that is invested in a partnership and uses the aggregate method to compute its tax can treat the proportionate share of the partnership’s assets as investment assets only if the investment capital requirement is met at the partnership level.

The October 1 timeline to identify assets for investment only applies to pre-existing assets. Identification after this date for any new assets purchased must be done by the end of the date of acquisition. All investment partnerships should have a mechanism in place to identify assets as held for investment – even if they do not have any corporate partners at present – in the event that a corporate investor comes on board sometime in the future.

September 2015 - Immediate Action May Be Required Prior to October 1 to Identify New York State Investment Capital

California Market-Based Sourcing Legislation

California raised some buzz in early 2014 when it drafted amendments to have its receipts factor to include market-based sourcing concepts as they relate to asset management firms. Management firms that receive management fees from its residents amounting to approximately $529,000 will have a filing requirement in the state even though there is no traditional physical nexus. Although the original regulation for market-based sourcing rule was in place since 2013, the California Department of Revenue had indicated that it would not start enforcing the amendments for asset management firms until 2015.

In January of this year, California removed certain subsection examples from the proposed regulations that were the key indicators of the rule’s applicability to asset management firms. We will closely monitor future developments in this area.

May 2015 - State Income Taxation of Cross-Border Asset Management Services

Tax Extender – Leasehold Improvements

I’ve been paying close attention to the tax extenders for one item that affects a lot of clients who want to see their capital improvements have a bigger write-off than over 39.5 years and am happy to report that the 15-year qualified asset treatment for leasehold improvements have been made permanent though there were some minor changes in the taxpayers’ favor as to what defines qualified leasehold improvements.

Tax Savings Considerations

QSBS
Qualified Small Business Stock (“QSBS”) has been around for a long time but that does not diminish its importance when it comes to tax treatment. QSBS rules may apply if you have made investments in corporations that have less than $50 million in assets, among other requirements, and have held the stock for more than 5 years. With proper handling, you and your investors may qualify for reduced tax rates on these investments upon sale. Remember to properly footnote those sales if you are the investment partnership with gains from QSBS in 2015 or, if you are holding such stock, to be careful in your planning. Another important note is that losses from QSBS stock have preferential treatment as well.

Worthless Stocks
Each year, we like to remind our clients to review their portfolio for stocks that are maybe worthless and to keep in mind the tax criteria. It is not enough that the book value of the stock is being written down to zero; in the tax world, there is usually an event that establishes the worthlessness status, whether it is cessation of business or liquidation of assets. Generally speaking, a security is worthless for tax purposes only if both liquidation value and potential value have disappeared. Potential value relates to the effects of future operations while liquidation value is the solvency of the corporation. Potential value may not be as easy to determine as liquidation value, which can be the cause of the nebulous determination when the loss can be taken as a deduction.

Administrative items

Partnerships are required to issue K1s to their partners on a timely basis. Failure to make delivery will subject the partnership to penalties. Beginning in 2012, the IRS set guidelines for partnerships to follow in order for electronic K1 delivery to be considered a valid form of timely K1 delivery. Remember: Even if you already have handled consent notifications for your existing investors, you must still obtain consent for electronic K1 delivery from any new investors going forward.

February 2012 - IRS Issues Guidelines for Electronic Delivery of Partnership K-1's to Partners