To make it easy for fund managers like you, Baker Tilly hosted our annual year end asset management webinar and provided insights on environmental, social and governance (ESG), tax updates and cybersecurity. Our practitioners provided reviews, updates and key topics to stay aware of as you navigate your business into 2024.
For more information about any of these topics contact our practitioners or watch our full webinar at the bottom of this article.
IRC Section 1061, introduced by the Tax Cuts and Jobs Act (TCJA) in 2017, recharacterized certain net long-term capital gains as short-term capital gains for partners holding applicable partnership interests (APIs). This provision affects the tax treatment of carried interests in hedge funds, private equity, and other investment partnerships.
In response to this limitation of the Tax Cuts and Jobs Act, many states have enacted laws allowing pass-through entities (PTEs), such as partnerships and S corporations, to elect to pay SALT at the entity level.
Proposed updates to partnership agreements:
During 2023, the IRS trained over 100 individuals on technical aspects of subchapter K, and they plan on using an Artificial Intelligence (AI) tool to look at returns and issue notices starting with large partnerships. Notices will begin being sent starting in Oct.
The IRS has key focuses on their areas of enforcement including:
Last week, the tax court made a significant ruling in the case of Soroban Capital Partners, L.P. v. Commissioner. The court ruled that limited partners in the hedge fund could be subject to self-employment tax on their distributive share of partnership net income if they are actively involved.
While social responsibility underscores transparency in reporting, stakeholders are demanding optimized operational structures that manage the global tax rate, meets demands of mobile workforce, maximize federal and state tax incentives and remains attractive to investors. It's important to architect a complaint tax solution that is sustainable, transparent and adaptable.
ESG emerged due to historical practices and the current social trend of expecting greater sustainability – including sustainability in tax. This includes:
The Inflation Reduction Act (IRA) enabled developers of renewable energy facilities to sell the investment and production tax credits (ITC & PTC) generated by their projects to an unaffiliated purchaser to offset their federal tax liability. IRA 2022 provides for a direct offset to tax liability in the form of a tax credit enabling all entities to utilize this legislation regardless of tax status.
The purchase of ITC and/or PTC is also a pathway to accomplish corporate ESG goals related to renewable energy. Under IRC §50, ITC will be recaptured if the asset ceases to be eligible ITC property (e.g., if sold, disposed, or otherwise ceases to operate) within five tax years from the point where the asset is placed in service. The amount of recapture phases down by 20% annually.
NMTCs were enacted with the Community Renewal Tax Relief Act of 2000 and since then over $80B of NMTC since inception without a known event of recapture. NMTCs stimulates commercial investment in low-income census tracts. It works by investors purchasing the stream of credits at a discount where their total return is in the form of the tax credits.
Financial reporting of NMTC:
Align with a cybersecurity framework and conduct an assessment against it (e.g., NIST Cybersecurity)
Implement cybersecurity program that outlines:
People: roles and responsibilities, subject matter expertise, employee training and social engineering testing
Process: policies and procedures, internal controls,
Technology: intrusion detection system (IDS), intrusion prevention systems (IPS), firewalls, ongoing monitoring, data loss prevention (DLP)