On-Demand: Alternative Investments Year-End Tax Update
The tax landscape has evolved considerably over the course of 2019 especially in light of Tax Reform. This webinar will discuss how to operate in a complex and changing tax environment.
Moderator: We're pleased to welcome you to today's webcast. In order to qualify for your CPE Certificate you will to remain logged on for at least 50 minutes, respond to three out of four polling questions. We would appreciate if you would complete the evaluation survey following the event. A link to the survey will be emailed to you automatically with the hour following the webinar.
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Today's speakers are Ramya Bala, Senior Manager EisnerAmper, Kayla Konovitch, Senior Manager EisnerAmper, and Virginia Miller, Director EisnerAmper. I will now turn it over to Kayla.
Kayla Konovitch: I'm going to start with some general partnership updates before I move along into the specific hedge funds and private equity funds. My objective is just to give you some highlights so that you're aware of some changes that are now in effect.
The partnership audit regime. This was created in 2015 with the Bipartisan Budget Act and has been in effect since January 2018. This essentially gives the government ... They can come in and audit the partnership at the entity level and assess tax at that level.
There's also a designation of a partnership representative for the PR and there's no longer the TMP, the tax matters partner. And there's also the option to have a push out election where the partnership can shift the burden of the taxes due to the partners for that reviewed year. This election has to be made within 45 days of the final adjustment. The IRS now says that they expect to have forms published coming this January 2020, and they also plan to implement an electronic submission process with modification and the push out process.
Kayla Konovitch:There's been a lot of questions as whether there's going to be an appeals process. And basically they said you can and there's a specific process in place that's really still being developed. But essentially after the examination teams completes their review, they're going to send a summary report package to the partnership and if the partnership representative disagrees with the merits of the issue, at that point a 30 day letter will be sent out and that will give the partnership the opportunity to appeal. However, if the appeal's process moves along but some issues are still not resolves, then at that point the notice of proposed partnership adjustment is issued.
Now, just talk about the W-8 and the 1042 filing, just a refresher. This is under the Chapter 3 and Chapter 4 reporting and withholding where you have a non-U.S. person that receives US source income, FDAP income ... That's Fixed, Determinable, Annual, or Periodic income, you may be subject to certain withholding and reporting requirements. I just want to emphasize here that a proper and a valid W-8 form is required to be kept on file by the partnership or the withholding agent, for each underlying owner or partner.
Now, beginning after December 31st, 2017 the foreign tax identification number and a date of birth is required to be provided on the W-8 form. This is a newer item, and there are some exceptions here that you can read. But essentially if you do not have the FTIN, or reasonable cause explanation then a withholding may result. Keep in mind that the W-8 is valid for up to three years, and a W-9 for a U.S. person it never expires as long as the information is correct. And note here that the IRS does intend to audit more entities under compliance and internal control procedures. It's just important to make sure that you're complying and you have the correct documentation in place.
Now, with the chapter three and chapter four there's been proposed regulations that were released, and there's some significant changes here that I just want to highlight. If a partnership withholds tax in a subsequent year to when that associated income is from a proceeding year you would still report it under proceeding years 1042 or 1042-S. That's one significant change. In addition, the lab reporting method was now modified. That's why you have FDAP income that has not been distributed to the investors in the current year.
A third significant item is if there's adjustments to over withholding. There's actually specific procedures [inaudible 00:05:33] follow under the reimbursement and the set off procedures. They can actually look at the instructions where it outlines the procedures that need to be done.
Now, to discuss the 1042 withholding and reporting in a subsequent year. What does that mean? If you have a partnership or a trust that is permitted to withhold in a subsequent year with respect to that foreign partners income for a prior year, you can now designate their deposit of the withholding as attributable to the preceding year, and report the amount on the proceeding year's 1042 and 1042-S. This is a change here.
If we look at this example, if a partnership withholds on April 1st, 2020 with respect to a foreign partner share of income for the 2019 calendar year the partnership can designate the deposit as made for 2019 and report that liability in the tax withheld on the 2019 form 1042 and 1042-S. There's also now a line 65B where the partnership can designate that prior year amount that was paid in a subsequent year. This change is really helping to streamline and match the timing together with the income.
Now, to talk about the 1042-S filing, a significant change here is, now there are two filing deadlines that are in effect as of January 1st, 2020. We have a March 15th deadline ... I'm sorry. Didn't flip the screen. We have a March 15th deadline for payments that are received and the cash or K-1 that was distributed before March 15th. That would still be reported on 2019 form 1042-S. And then there's a second deadline, September 15th, for payments that are received ant the K-1 that's distributed after March 15th and you report that on a 2019 form 1042-S.
Let's look at an example. If you have a fund that received $100 dividend in June 2019 and distributed that cash or the K-1 to the foreign partner on February 2020 the dividend is reported on the 2019 form 1042-S, and that is due by March 15th and eligible for the 30 day extension. In a second example we have a fund that received $100 dividend in October 2019, and the income in a K-1 was distributed in April 2020. That dividend is reported on a 2019 form 1042-S that is now due for September 15th.
This is actually a favorable change and it helps streamline the process. It better matches the income withholding and reporting although there is additional compliance here. There's also another check box added for box 7C where the partnership can indicate if a withholding was made in a subsequent year. And always just keep in mind that the penalties for filing of incorrect 1042-S is $270 per form (per copy), and in case of intentional disregard it can be as high as $540 per form.
Now we all got a surprise. The IRS updated the 2019 schedule K-1 and 1065 form, really requesting a lot of additional information to be reported. The intent here was that this way the IRS, they can assess compliance risks, and identify any potential noncompliance. Just to touch on some of the changes here, one item is the partners’ capital account analysis. It must now be reported on tax basis. There are some questions with, how do we compute tax basis capital? But this is actually going to be a very big item for us. Our funds are mostly reported on GAAP, and that's now going to have to be converted over to a tax basis.
In addition, the K-1 needs to report each partner’s share of a section 704(c) unrecognized gain or loss. That's where you have the contributed property with both gains and losses. In addition, the K-1 you now need to report to every partner their section 751 gain or loss. And now you'll need to indicate if there's been a change in ownership, if there's been a decrease that's due to a sell or exchange of a partnership interest. You'll also need to indicate if the partners share of liabilities includes an allocation from a lower tier partnership, which is very common in many of our fund structures.
You need to indicate if there's more than one activity for the grouping or aggregation purposes for at-risk or passive activity purposes. The guaranteed payments, you now need to break out between payments for use of capital, which is typically treated as interest or for payments that were for services. There's also boxes 11F and 13V that now you'll have to report the positive and negative section 743(b) adjustment for the partners. There's some real significant changes here.
Now, this is ... They now have a new draft version, but this just gives you an idea of what the K-1 is going to look and we highlighted some items here. Note that Box 20 also has some updates to the code, so just pay attention to that.
Now, the 1065 partnership return. There are some additional questions that you now need to answer. You need to answer whether the partnership aggregated activities for section 465 for at-risk or if they grouped activities for the passive activity purposes.
In addition you now need to enter the number or foreign partners that are subject to section 864(c)(8). That's where you'll have a foreign partner that transferred or sold their interest and it's looked at as if they sold the assets of the company in a hypothetical liquidation and where part of the gain would be treated as effectively connected income, would be treated as ECI. And there may be withholdings. You now have to indicate how many foreign partners were subject to this 864 section.
In addition, for section 163(j) the business interest expense there's a question if the partnership is a tax shelter, and they have business interest expense. You're required to file the 8990. And you need to answer if at any time during the year, there were any transfers between the partnership and the partners, where there's additional disclosure that's required under the regulations 1.707-8. That's the [inaudible 00:12:53] rule.
Overall, if you look at the updates to the Schedule K-1 and the 1065, you can see here that a significant amount of time is going to be needed to comply with additional requests to the IRS and to the partners. This is something to keep in mind going into the season, and some of this you may be able to work on now before year-end, so something to think about.
Moderator: We have now reached polling question number one. Which method does your fund currently use for reporting capital accounts to its partners? A, tax basis, B, GAAP, C, Section 704(b). D, other. Please remember, in order to qualify for your CPE Certificate, you must remain logged on for at least 50 minutes and respond to three out of the four polling questions. We'll give everyone a few more minutes to respond. (silence). We're now closing the poll and sharing the results.
Virginia Miller: Do we have the results?
Virginia Miller: No? Thank you. As we expected most of our K-1 has been issued on a GAAP basis. That would be a significant change so that we make sure that we have our historical tax basis before year-end if possible. If not, we will work with that during tax season.
Now, we're going into a few of the considerations for hedge funds that we should look into. Okay, first being tax lot methodologies where you're identifying which tax lots to close either on a long position or a short position. Please keep in mind that your administrator and your broker should be offsetting or closing out the same tax lots if at all possible. And definitely, any specific tax lots must be identified before the settlement date of the closing transaction.
The most common relief method for our hedge funds is high cost or best tax. Meaning that you're looking to minimize the gain or use the best tax effect using the tax rates of 20% for long term and 30% for short term. Also you can use specific identification meaning that you're tracking the lots and identifying them through your brokers and your administrators to close out.
We're also looking at tax lot harvesting where we're looking at holding periods of your specific lot. As you're looking to see if the lot is getting close to a long term holding period you may want to close that out or hold onto that so that you can reach the long term holding period first.
Keep in mind that when you're covering short sales you have to settle that lot is closing out of short before year-end, meaning before December 31st. And if you are looking to realize a loss for worthless security you have to document the worthlessness of that security. It's not just enough to say the position is no longer of market value, but you have to look at the specifics of what's making it worthless.
Virginia Miller: Other considerations for loss of deferral and gains acceleration. Very typical in our hedge fund industry is wash sales. If you closed out a position at a loss, you must stay out of that position or substantially identical position within 30 days to basically be able to take that loss in the current period. If you do get back into the position, that loss is not loss forever, but it is deferred in the subsequent year. These definitions here is whether a position is substantially identical. It is facts and circumstances, so we should discuss that with your team at EisnerAmper.
Also straddles. If you are holding offsetting positions where one leg of the offset is sold at a loss that loss may technically be disallowed in the current year if you're holding an offsetting position with an unrealized gain. Also, please keep in mind that the holding period of that loss transaction may be suspended or terminated based on the offsetting appreciated position.
And on the flip side, a constructive sales is if you are holding a box transaction, meaning a both long and a short. If you have an unrealized gain the IRS may require you to pick up that gain in the current year as opposed to when you're closing out the transaction. There are certain exemptions for short term hedging, but again those are fact specific, so we should review that and discuss that before we recognize any additional gains.
One major component for the hedge fund industry is whether a fund is deemed to be a trader or investor. We have to look and review your portfolio, your document, meaning your partnership agreements and your PPMs, and definitely the activity of your portfolio. This is an annual test, so this may change from year to year. But if your documents specify that you are holding certain things for long term appreciation, that'll more likely indicate that you're an investor fund.
To qualify as a trader fund there are no specific rules and regulations, but it is fact specific, meaning that the more often you turn your portfolio over you're most likely to be treated as a trader. The main impact to your investors is how to use deductor. How do they deduct the expenses? Meaning the management fees, professional fees, and the likes of the fund.
If you're a trader fund, you are in a trader business. Therefore, the investors can deduct those expenses what we call above the line. But if you're an investor fund, most likely those expenses will not be deductible because under the tax reform act the 2% deductions or itemized deductions are no longer allowed and were eliminated.
Other items to consider are the mark-to-market regimes, where certain types of instruments are deemed to be mark-to-market or deemed sold before year-end, or as of the end of the year and therefore any gain or loss is picked up in the current year. The most common are what we call major currency contracts or Section 988 PNL that is mark-to-market at year-end and picked up as ordinary income. The other more common is the 1256 contract, where it regulate the features contract, exchange traded on a U.S. or a qualified water exchange. And the benefits of that is that it is treated as capital gain, 40% being short term and 60% being long term. And lastly the 475 funds where all positions are mark-to-market at year-end and deemed realized, and that income is picked as ordinary income.
And lastly notional principle contracts mostly swaps certain types of swaps. We would review your portfolio to make sure that you are picking up the correct mark-to-market. Other items is to review your portfolio and your holdings reports for investments in foreign corporations. Most common are PFIC or passive foreign investment companies, where you would pick up the income as these are ordinary income or long term capital gain, unless you've made some other elections that may qualify as mark-to-market as well. Again, we must review your portfolio to determine whether the investments in a foreign corp are PFICs and you must obtain a PFICs statement from the underlying security.
Next is a qualified foreign corporation. The tax reform also its expanded definition where now you are looking to see where you have 50% or more of the voting or the value of all shares of stock. And the implication of that is you would pick up any income at Subpart F and that's ordinary income. Also, you may have some GILTI. That was as significant change last year where you have to review each of the underlying CFCs, to make sure that you're picking up the correct income.
And lastly, some additional foreign filings that may pertain to foreign investments in foreign corporations, 5471, depends on the category or the percentage ownership that you own of the underlying entity. You may have multiple categories which require minimal or significant disclosure. 8865 pertain to investment in foreign partnerships. In our industry most likely it's the master funds. The master fund would probably already file a 1085, but any U.S. investor that owns more than 10% or so indirectly or directly may have to also file the 8865.
And 8858 is for a disregarded entity, an investment in a foreign disregarded entity. Again, it's just additional disclosure that may apply to US investors. 8621 is the form where you're disclosing any investments in a P6 and disclosing any of the income that you may be picking up. And lastly, a form 926 is for disclosures of investments in foreign corps of 100,000 or more over a 12 month period. And lastly, the FBAR filing pertains also at the fund level and the individual level.
One of the major impact from the tax reform was the 1065 or carried interest where you're looking through to realizing at the fund level whether they were held for more than three years. And if so it maybe recharacterized as short term at the investor level. It's not recharacterized at the fund level, but it is passed through to the investor to ultimately make that reclassification.
We're still waiting for additional guidance from the IRS to clarify certain of the applications to this rule or this rule change. It may also be now less advantageous for a general partner to have an incentive reallocation but may consider changing the incentives or performance to an incentive fee. And also consider whether the GP entity should be treated as a corporation as opposed to a flow through entity.
And as Kayla mentioned earlier 163(j) was also a major change in our industry where we're looking to see whether it's a trader business and whether it's any interest expense. Not dividend expense, but actual interest expense maybe limited into deduction at the individual level. Sorry, at the fund level and also at the individual level.
The big impact for 2019 is if you had any excess business interest expense that was disallowed in '18 whether you can actually deduct any of that or some of that in '19. To be specific you have to have incomes from that specific investment in order to release any of that carry forward.
One of the topic is qualified opportunities zones. Whereas if you have capital gains from the seller exchange or property to an unrelated party, you can reinvest that gain within 180 days or by December 31st, 2026 and the further gain may be able to reduce part of that gain or eliminate the gain in a qualified opportunity fund investment. What are capital gains? Including that capital gain could be short term, long term, unrecaptured 1250, collectible SEC 1231 gain or any 1256 gains that is not part of a straddle. That pretty much captures all gains that are part of the hedge fund world.
If you have any of that gains, the fund can make the election to reinvest it in a QOF vehicle, whether it's a corporation or a partnership and that QOF its main purpose is to invest in a qualified opportunity zone property. An example of this is if one of our funds, the partnership realizes a million dollar capital gain let's say on June 15th, 2019 it can elect the further gain by investing in a qualified opportunity fund within 180 days or by December 12th, 2019. If the fund elect or the income will not be reported to the partners, and the election to the fund would have to be in the partnership return.
If the partnership does not elect to the further gain, each partner can then defer its share of the gain within 180 days of June 15th or within 180 days of the partnership year-end. The K-1 that's issued to the investor would have to have the details of that gain in order for the investor to then possibly make the election to defer. If an investor does reinvest in a QOF, the initial basis will be zero and if the investment is held for five years, then 10% of the original gain, in our example, the million dollars would be deferred.
Virginia Miller: If the investor then also holds the investment in the QOF on additional seven years, then additional 5% of the gain is deferred. And lastly, if the investment is held to December 31st 2026, any gain on that subsequent investment would be deferred indefinitely. And with that we're going to the next polling question.
Moderator:We have now reached polling question number two. Have you or your fund elected to defer capital gains by investing in a Qualified Opportunity Fund? A, yes. B, no. C, not yet, thinking about it. D, would like to hear more about QOF. Please remember, in order to qualify for your CPE Certificate, you must remain logged on for at least 50 minutes and respond to three out of the four polling questions. We'll give everyone a few more seconds to respond. (silence). [inaudible 00:28:32]. We're now closing the poll and sharing the results.
Ramya Bala: That's interesting. A lot of nos there and not yes. Definitely now would be a good time to call us and see how we can help you by considering your reinvestment in qualified opportunity growth. Thank you Virginia. Though this is not really a fund consideration, but definitely what you're mentioning as it directly impacts the individual tax payers. There is a new question on your 1040. As the service gets tedious about cryptocurrencies. There's a small check box that appears on the second release, the early draft, and it reads, "At any time during 2019 did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?"
Now be mindful. Since July earlier this year, the service has mailed letters to over 10,000 taxpayers suspected of having crypto transactions or holdings. The letters are advising taxpayers to pay back taxes or even file amended tax returns. Now there are three different kinds of letters that are out there, and the most important letter is the letter 6173. Now this letter simply starts by saying, "Why we're writing to you." And then it goes on to say, "We have information that you have or had one or more accounts containing virtual currency, and may have not met your U.S. tax filing and reporting requirements that involves virtual currency." It also informs the tax payers that, "Virtual currency is considered property for federal income tax purposes and is subject to reporting and taxation."
At the end of the letter, what's interesting is that actually requirements for a signed affidavit. Would say is if you believe that this was sent to you in error, or if you have already fulfilled all filing obligations regarding virtual currency, and you're required to send a statement of facts and a complete history of previously reported income from your virtual currency transaction. And it's pretty interesting that you actually have to sign and declare that.
What are securities? An IRC Section 165(g) allows for a worthless security deduction. "What's worthless security deduction?" You may ask. We all have heard what goes up will come down, but sometimes the downfall is just downright bad. It's plain worthless. Every now and then investments are made in those promising startups that ends up going out of business. You may not be able to fully recover your investment, but there are definitely some tax deductions that can be utilized.
To qualify for a worthless security deduction, your stock, bond, or other security must be completely worthless. This literally means it is worth nothing. A mere drop in market value of stock or security, even if it is a significant drop, does not qualify for the deduction. Now, as a taxpayer claiming worthlessness, you have the burden of proof. Why do you think the security has no value anymore?
Has the company stopped doing business? Has the company insolvent that the assets are worth way less than the debt? The company's assets have been liquidated or sold? Has the company filed for bankruptcy or a bankruptcy to see what it was appointed? Now, I do want to make a comment to here, that even if there's a chance, a slight remote chance that your securities have some value, they're not worthless, which means that even if a corporation, you are invested filed chapter 11 bankruptcy, your stock would still have value during or after bankruptcy.
Therefore, the bankruptcy itself is not enough to establish a zero value. Now again, just to emphasize the key here is the error of worthlessness. It was not the year before, it is worthless now, current year. And it's okay even if you missed it because I always give you up to seven years to go back and amend your tax return and take a credit or refund due to the loss.
UBTI and tax-exempt entity. Now, particularly the public and the private pension funds endowments and the foundations historically has been major source for capital for private equity funds. The experts believe that they almost account for 38% of the total number of PE funds and contributing as much as 30% of the total capitals. Now IRC section 501 grants tax exempt status to a variety of tax exempt and mutually beneficial organizations. However, IRC section 511 may tax these otherwise tax-exempt entities on their unrelated business income, hence UBTI. Clearly the tax-exempt entities are extremely sensitive to UBTI. Quickly, what's UBTI?
UBTI is defined as a gross income derived from unrelated trade or business regularly carried on by an organization that is otherwise claiming exempt status. Now usually gained from sale of stock, interest, dividends are not part of UBTI unless they're derived from that finance property. Now that's something to keep in mind. The other item that also triggers UBTI is bridging or short term borrowing. You may ask how so? In order to close an acquisition in between capital calls and to award maintaining large reserves, many funds routinely borrow.
Now, bear in mind, this course of action raises the specter that the fund has now incurred acquisition indebtedness under the first prong of section 514 definition, because the debt was incurred to acquire the investment and this may trigger UBTI. Historically UBTI, a tax-exempt payer could aggregate their income and losses effectively applying loss from one business to reduce the taxable income of another. Under TCGA, this has slightly changed. Now the tax exempt must calculate UBTI independently for each unrelated trade or business.
What does it mean? Which means your losses of investment A, cannot reduce your income from investments B. Now losses are not completely lost. The tax-exempts can claim loss against a future income as long as they keep track of it on a periodic basis. Another thing to note that the TCGA also reduce the tax corporate way flat to 21% from the range before. Since most of the nonprofits pay the corporate tax on UBTI, your tax liability potentially could fall even though your overall UBTI increases.
Another consideration in the space of UBTI was IRS notice 2018-67. And some new UBTI rules were put under section 512A6 for exempt organization investing in partnerships. An exempt organization may aggregate its interest in a single partnership with multiple trade or businesses. And that's where most of them fall. If it meets either one of the two tests. The first test was De Minimis test and the second one was control test.
The De Minimis test said, "The organization directly holds no more than 2% of the profit or the capital interest." The control test said, "The organization directly holds no more than 20% of the capital interest and does not have control or influence over the partnership." Now be mindful if an organization satisfies either test, it may treat the aggregate group of partnership interest as a single trade or business for these purposes. Which basically means that you will be able to utilize those losses a little bit more efficiently.
Another interesting fact here is if you acquired a partnership interest prior to August 21st, 2018 you may treat each partnership interest as a single trade or business regardless of whether it meets the test or there's more than one trade or business that directly or indirectly is conducted by the partnership, or the lower partnership. Again, typical [inaudible 00:38:08] of one scenario.
Now, apart from the issues of UBTI, one of the other private equity consideration that we have to be mindful about is ECI, which is your effectively connected income. Now, effectively connected income largely mostly affects your foreign investors, and they could be very sensitive to how it impacts the tax filing obligation and tax payments. Your income that is effectively connected will be of course reported to the foreign investors on form 8804 and 8805.
This would potentially trigger the foreign investors to hire a U.S. filing requirement. The fund is responsible for withholding on the effectively connected income. The corporate rate is 21% and the non-corporate partners up to 37%. An interesting question in this space for ECI is, what happens with the sale of operating partnership interest? Now, how is this income treated for ECI purposes?
Historically, that has been a lot of back and forth capital gains taxes ordinary, ECI tax for foreign investors or not. In November 27, 2017 there was a popular Grecian Magnesite case. This was a very notable decision. Why? Because this decision, the tax court declined to follow the revenue ruling 91-32 which historically has suggested treatment of such income as ECI. Under TCJA, this was codified into the law, and now the sale of an ECI generating partnership interest has to be treated as ECI, and is subject to withholding and payment to IRS.
Some of the other issues to look out is filing for state tax returns. Now be mindful of some States like Georgia, New Jersey, New York would require a filing in the state merely because an investor maintains residency there. Now, other states require you to file and potentially withhold and pay taxes when an income is sourced to them. One of the key thing to remember here is, understanding potential additional state filing requirements due to the state of partnership interest, because this would trigger a lot of state filing obligations and you have to do proper withholding at the fund level to avoid late fees and penalties. I think it's time for our third polling questions and then we can quickly chat about some more recent state tax development.
Moderator: We have now reached polling question number three. Did you feel the impact of new tax regime? A, the tax laws changed. B, somewhat. C, definitely. D, it impacted the way we structure funds. Please remember, in order to qualify for your CPE Certificate, you must remain logged on for 50 minutes and respond to three out of the four polling questions. We'll give everyone a few more seconds to respond. (silence). We're now closing the poll, and sharing the results.
Ramya Bala: I'm glad everybody felt the impact of new tax regime. What do you think Virginia? The tax polling results are saying that there's still about 4% who did not feel the impact of new tax regime.
Virginia Miller: That's very interesting. We definitely need to discuss the tax law changes with those particular clients or staff members just to make sure that they're aware of the various changes-
Ramya Bala: Right.
Virginia Miller: and make sure that they are capturing all the compliance that they need.
Kayla Konovitch: And I would add to that, especially with the new 2019 schedule K-1 and 1065 just really a lot more. We need to think about it. We need to be disclosing. And those are items[inaudible 00:43:40]-
Ramya Bala: Right, right.
Kayla Konovitch:Starting now with year-end meetings and-
Ramya Bala:Discussions in November and December is just a perfect time to do some tax planning for everyone. All right, welcome back. As we dive a little bit closer into some current state and local developments. Now, Florida earlier in August this year issued tax information publication number 16C01-O3 that provided that additional filing requirements for covering income tax payers for 2018 and 2019 taxable years.
Now, any corporate taxpayer with a taxable year beginning during 2018 or '19 calendar year that files a Florida corporate income tax, that's your F1120 or F1128 is required to report additional information on the Florida Revenue website. It's actually pretty easy to navigate that site. And it lists down all the questions that the Florida state is trying to collect from its taxpayers. And we just need to have your prior year and the current year tax return in front of you if at all, and you should be able to fill out most of those questions.
Now this information is required to be reported online of course, and its due 10 days after the extended duty of the Florida income tax return, or if you filed your tax return earlier, 10 days after the tax return was actually filed.
New Jersey earlier this year, adopted market sourcing for Corporate Service Providers. All tax years beginning on or after January 1st 2019, New Jersey changed the sourcing rules for services performed by corporate tax payers. A big impact is the accounting on the law firms. Thus, any firm organized as corporations must now source their revenue from services to New Jersey using a market based approach. This new market sourcing approach is also client-focused and it could potentially dissolve in the shifting of a portion of the tax burden from in-state to out-of-state service providers.
I think one of those interesting tax [inaudible 00:46:06] not directly impacting your fund, but I'm sure if you want to Connecticut listener, you could feel an extra pinch effective October 1st. Taxes and fees increase on these six items in Connecticut beginning of October 1st. The prepared foods, I'm told by someone living in Connecticut that the definition of prepared food was an interesting discussion and the state tried to extend is the prepared food definition to as much as potato chips. That did not go very well. Prepared foods went from 6.25% to 7.35%. The vehicle trade-in fee, which historically has been $35 went up to $100 dollars per transaction. The digital download, I tuned in all the lights from 1% to 6.35%. The alcohol, electronic cigarettes and other short term rentals also saw an increase.
Another states to embrace the market-based sourcing was Colorado. Now Colorado, this is not according to 2019, but we're beginning to see the effect for it. It adapted for market-based sourcing for tax years beginning 2018. A taxpayer's market for sales is in Colorado if the receipts are from his service delivered to the location there, the sale, rental, lease, or license of a real property located in Colorado, the rental lease or license of tangible personal property located in the state, the intangible property use in marketing a good or service that is purchased by a customer in Colorado, a contract right, a government license or a similar intangible of a property that authorizes the holder to conduct a business in a specific geographic area in Colorado.
That covers some of the recent developments in state and local developments. Stay tuned for some of our next state specific webinars and discussions where we will probably talk about the impact of a change in California or Connecticut laws and how that could potentially give you some opportunities to do some tax planning. Now ready for our fourth polling question.
Moderator: We have now reached polling question number four. How often do you think about taxes? A, after year-end when we prepare taxes. B, October, November. C, all the time. D, never. Please remember, in order to qualify for your CPE Certificate, you must remain logged on for at least 50 minutes, and respond to three out of the four polling questions. We'll give everyone a few more seconds to respond. (silence). We're now closing the poll and sharing the results.
Ramya Bala: How often do you think about taxes? All the time. I think this is a perfect response to what keeps you up at night and looks like taxes rank number one.
Kayla Konovitch: We're all likeminded.
Ramya Bala: That makes me think one of the biggest conversation that we would be having with our clients and of course internally also is the new K-1s, the 2019 K-1s. As we're preparing to fill those forms or as they're getting ready to gather data to fill those forms, Kayla what do you think is the most important that we need to keep in mind? Either while we're getting ready for the 2019 new K-1s or whether we're talking about the 1042 forms that goes into effect. What are your thoughts?
Kayla Konovitch: Regarding the 1042s and the filing, what we've seen is that many funds have a lot of foreign partners and it could be a task making sure every EWA is in place. Really you should spend some time reviewing the form. That could be that you have a foreign investor, they fill it out, send it over to you, but it may not be complete and accurate and it is the partnership or that was holding agent's responsibility to take a look and make sure they have a valid form. That's just something to focus on and make sure you have in order. You can always also reach out to us and in our national team, we can take a look at it to just make sure that it complies.
Ramya Bala: Right. And one of the things that I really wanted to add there is, one of the most important aspect of having a complete documented form is actually have a signed form. You'll be surprised how many times the form is actually filled out for the most part very accurately. And it's trying to claim all tax treaty benefits, but the form is not fine. One of the things that you have to make sure that the forms that actually signed-
Kayla Konovitch: Right. Yeah.
Virginia Miller: By the authorized person.
Ramya Bala: Absolutely, by the authorized person. Virginia what are your thoughts as you're getting ready to prepare and look at 2019 K-1s?
Virginia Miller: First of all the draft K-1s, we did take a step back as to how much piece of information is required. One of the things that we're looking into is making sure that the tax base's carry forwards are available and accurate. We can start by making sure that we have all the prior year K-1s. That may be a task in itself, especially if you've changed auditors or you change accounting firms. You make sure that you have all your historical K-1s and you're tracking the tax bases of your current investors.
If investors have redeemed in the past, they probably kept their own tax bases. But going forward as a start, we had disclosures last year for any investors with negative tax bases. Now we're taking one step further to making sure that all investors' tax bases is available and calculated. Just as a preview, it would be distributions. If they're cash, it's obviously cash basis. But if it's property, you're looking at the cost of that particular property increased by taxable income, decreased by any other 743 adjustments. Making sure that you have that level of detail available for all of your investors for prior years and making sure you have a good tax basis coming into 2019.
Ramya Bala: And this can easily get into a very voluminous task if your fund typically sees more than 200, 300 investors, because that would require you to go back and actually get the meaningful data and document into the right way. Because now it's going to end up on your face of your K-1s.
Virginia Miller: Correct. And especially if you have a fund that's been around private equity fund, let's say for multiple years, 10, 15 years, you have to make sure you have that documentation readily available.
Ramya Bala: Great. Thank you Virginia.
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Transcribed by Rev.com
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