Year-End Tax Planning Webinars for Funds and GPs | Part I

Okay, so as we enter the last two months of the year, it is really important for funds to get a sense of how taxable income is tracking for 2025. This is important, so funds are able to make informed decisions prior to year end to try to limit their 2025 tax liability and also to properly communicate and plan for any tax liabilities that may be applicable to both the gps and the LPs. Though the best way really to get an understanding of how your taxable income is tracking for 25 is to put together some type of year end tax estimate and really the year end tax estimates can come in all shapes and flavors depending on the complexity of your particular fund, the needs of your particular LPs, and really what makes sense to give you at least a broad overview of how the taxable income is going to be shaking out. Remember, your economic income or your book income is very often not the same as your taxable income. Particularly for funds that have complex structures, a lot of different types of financial products, which we'll go over shortly. Your economic income could wildly be different from your taxable income. So it's not prudent to always rely on the monthly nav statements that you may be getting. Really getting into your activities for the year and analyzing what the tax will be can provide really good insight into the year end and what to expect. Come K one time.

Simcha David:

And Brett, how many conversations have we had with clients where they say, well, based on my financials, we're down for the year and all of a sudden there's tons of taxable income. So you do need to be aware taxable income is not, it's not the same measure as you have with your financial income, which takes into account the unrealized. So keep that in mind as we go forward.

Brett Cornell: Yes, correct. So we're going to go through a couple of some of the main book to tax adjustments that we typically see in the hedge fund space. First we'll go over a couple of mark to market. So if you're a fund that for example is trading in index options or futures, those are 1256 contracts and 1256 contracts fall under a mark to market regime, which essentially means that the IRS views any holdings of an index option or future is year end as being realized at the fair market value as of year end. So while you may not have actually sold these particular instruments and think that you may not have any taxable income associated because there's been no sale, the mark to market regimes will actually bring that income and tax it currently based on the fair market value at year end. So for example, as I mentioned, the 1256 contracts, you're still going to get that 60 40 long-term short-term treatment.

None of that goes away. It's just essentially an acceleration of either income or loss based on fair market value of what you're holding at year end. So again, this is an item that you might be reviewing your trial balance and you're reviewing your realized p and l and say, okay, here's my realized p and l, this is what I need to pay tax on. And forgetting that you may be holding certain instruments that are subject to these mark to market rules like 1256, like the FX forward contracts like total return swaps that need to be looked at and quantify what that impact could be for your overall tax picture.

So not just book to tax differences that'll change your total taxable income. You're also going to want to look at certain tax reclass where it doesn't necessarily change the total of your taxable income per se, but it could impact the character of that income. And we often see this with our funds that trade in debt instruments that end up being subject to market discount regime. For example, just a quick note on market discount. Market discount is when you are trading certain debt instruments, certain discounted debt instruments on the secondary market. When you go to realize these positions and sell this debt at a gain, you may think that the entirety of that gain will be capital gains. Maybe you're trying to get long-term capital gain preferential treatment from these positions, but you need to understand that with trading and discounted debt instruments, the IRS views the spread between the discount and the par value as interest income and not as capital gain. So a piece of your overall realized gain that you were hoping to potentially get capital gain treatment on may in fact be interest income, which would get passed through to your investors with ordinary tax character. So again, something to be aware of as you're reviewing your portfolio is not just looking at your financials and say, here's my real realize, here's my unrealized, but really understanding what instruments you're trading, what the tax character could be, and really what the tax impact would be on these instruments.

So no hedge fund tax consideration webinar would be complete without talking about the big three in security analysis. That's our wash sales, our straddles and our constructive sales. These are timing difference provisions, basically that either, and we'll go through each one, but basically either disallowing losses or accelerating gains. So these are provisions of the code that we often see book and tax differences. So let's go into wash sales first,

Simcha David: And this is a situation where you actually have a realized loss, oh look, I've got a realized loss. I sold something at a loss, but you're not going to get the benefit of that loss because you went back into the position. And so definitely something you may want to think about on an interim basis because that could really affect, if not looked at properly, it could really affect your taxable income. Go ahead Brad.

Brett Cornell: Yeah, correct. So as Simcha alluded to wash sales, that's when the IRS is looking to disallow a loss. Basically the wash sale rule disallows the loss on the sale of a security if a substantially identical security is purchased either 30 days before or after the sale where that loss is generated. So basically the IRS is saying, Hey, we don't want you to, let's say you have Apple stock that you want to sell at a loss, but you still really believe in the future of Apple stock. The IRS doesn't want you to go in there and be able to take those losses without really changing your economic position. So if you enter right back into that position, basically that loss that you generate would be disallowed to really a future year where you actually fully get rid of that position or there's some other techniques you could utilize as well, but in general, those losses are going to be disallowed if you enter into the same position.

Simcha David: Did you say a loss on Apple? I don't think that's even possible stuff.

Brett Cornell: Yeah, yeah. Well for simplicity, but yes, it's been doing well's. Yeah. Next up straddles. So straddles is where you hold offsetting positions in actively traded personal property where there's a substantial tion of the risk of loss. Basically you have exposure on both legs of the trade. So what the IRS here is saying is they don't want you to be able to, for example, take a loss on one leg of the trade and have an unrealized gain on the other leg of the trade and basically accelerate losses while still having the gain while deferring gain on the other side. So again, a timing difference here, straddle rules will defer losses until the other leg of your straddle essentially is relieved and there's some holding period considerations you have to be concerned about there as well. But again, just for purposes of this presentation, just think about offsetting positions when the risk of loss is substantially diminished.

Lastly, constructive sales. This is when you enter into they hold appreciated financial position and you enter into an offsetting transaction with respect to the same or substantial identical property. So for example, you're long on a particular stock and have built-in gain there and you take an offsetting position that could be a shore or a future or an NPC essentially locking in that gain. The IRS says, Hey, if you're, you've basically limited your downside exposure, but you're keeping the unlimited upside exposure, it's effectively a sale and the IRS is going to treat that transaction as being a realized transaction. Even though you had just boxed the position, you didn't necessarily trade anything, sorry, you didn't necessarily sell that position, you just boxed it. But the IRS is going to view that as a sale. So again, that's going to accelerate gain. There are some ways to kind of unwind the offset and be able to not have to pick up the gain in the current year, and we have that listed on the slide.

But again, for this purpose of this conversation, just think about when you're boxing in, again, think about constructive sales and really the reason we bring up all these security analysis is to let you know that these are items that could significantly change your taxable income from what you may think it would be, right. These are going to be either disallowing losses or accelerating gains that would be different from what you're seeing on the books. So really important to prior to year end, get a handle of have I tripped up any of these rules? Are there ways that we could maybe still harvest losses prior to year end without tripping up wash sales or constructive sales or straddles? And really you can work with your tax advisor. We do this with a lot of clients where we'll run a security analysis for them based on information through September or even through October. Give them a sense of what they're looking at as it relates to these adjustments and that way we can really be strategic prior to year end to optimize our tax efficiency.

Okay. Moving on to trader versus investor. This is always an interesting discussion with clients. Broadly speaking, hedge funds kind of go into two different categories, either an investor fund or a trader fund. Investor funds typically are more buy and hold strategies. They're looking for long-term appreciation in the market, whereas trader funds are more, they're more active daily in their trading. They're looking for short-term swings in the market, smaller holding periods, actively trading every day. So really on an annual basis, this is a facts and circumstances test. So on an annual basis, you need to take a look at whether you have a position to file your taxes as a trader fund or really as an investor fund, and we'll go through some of the factors that we look at when making that determination, but there's consequences to being treated as one versus the other.

Simcha David: I think with the loss of the 2% portfolio deductions as your next bullet point that's been extended that permanently, that is where we got a lot of discussion around investor versus a trader. Because if you're a trader, as you know, I'm sure you're going to mention that the expenses are deductible versus if you're an investor then they're investment expenses and they're not deductible. So a lot of pressure on us to let you know that, hey, look, I'm a trader. It's facts and circumstances based. There are a lot of nuances around it. There are some that are clearly investors and the trader bucket doesn't apply to them. Go ahead. I just wanted to kind of point that out.

Brett Cornell: No, thank you. Exactly. I mean obviously with the big beautiful bill permanently extended, really the non-deductible of the 2% portfolio deductions. So if you're an investor fund deductions for think accounting fees, legal fees, compliance fees, really the fund's, general expenses, those effects will become non-deductible for individuals. So for the individual LPs, so the after tax returns obviously take a bit of a hit as compared to trader funds. Having said that, if all the facts and circumstances lead your fund to being an investor, we can't necessarily put you as a trader. It has to be a facts and circumstances dependent analysis that would hold up if the IRS were going to take a look at it. So things we look at really for trader versus investor, we look at trading volume. We like to see thousands of trades, number of trading days that you'll be trading really continuously throughout the year.

Holding periods. You're going to be for a trader fund mostly in short-term positions, you're turning your portfolio over regularly. And then there's also some qualitative factors of just really what do your fund docs say? What is the strategy of the fund? Are you really buy and hold or are you actually trading on a daily basis looking for those short-term swings? So the facts and circumstances will dictate this, and again, the business expenses that are allowable as a trader is advantages. So we have had to have some of those tougher conversations with clients that are investors,

Simcha David: And I will tell you that what people don't realize is the IRS will go straight to your offering memorandum and look at your investment strategy and if your investment strategy is to find good stocks, trade around them, but hold them for long-term value that's going to work against you. That's why you find sometimes investment strategies could be a little more, not as specific as the strategy that you're actually participating in, but yes, you may think you're a trader, but if your documents say that you're investing for long-term value, that's not a good factor.

Brett Cornell: So obviously we want those business deductions as a trader. We'll go into 4 61 L in a little bit. That's going to be applicable to trader funds, the excess business loss limitation rules. We'll go into section 10 61 on one of the next slides as well that's more applicable to investor funds, but just wanted to give you a quick note on 4 75 F elections to consider those for trader funds. So the trader investor analysis we just went through, if you end up being a trader fund, you're able to make what's called the 4 75 election, or we like to call it a mark to market election, which basically will treat anything you're holding at year end will be marked to market and that mark to market unrealized plus anything that any realized gains you've had throughout the year, if you made a 4 75 F election, it converts all those capital gains into ordinary income.

And why would anybody necessarily want to do that? You might ask for one thing is that entire security analysis that we just went through, all the book tax differences basically goes away if you're a 4 75 fund, right? You're marking everything at year end, so all those timing differences kind of go away. So the tax compliance and tracking and all that becomes a little bit easier on a 4 75 fund. Also, if you do happen to have losses in a particular year, those losses will be treated as ordinary losses which are able to offset different types of income as opposed to capital losses that are limited to capital gains. One thing is obviously there's that capital, that ordinary losses is some different considerations now that 4 61 L is in play and also you're no longer able to carry back net operating losses, so those ordinary losses may not be as valuable as they used to be. So just make sure that you're aware that these elections are out there and make sure to have a conversation with your tax advisors. This is a bit of a complicated area. The one thing I will just point out quickly is 4 7 5 F is an actual election with the IRS, the trader versus an investor that we just went through previously. That's a position you're taking on your return. You're not filing an actual election 4 7 5 F, you are filing an actual election

Simcha David: And then there's strict timing around that. So be aware if that's something that you're interested in doing. You can't just decide for the current year just to wake up and make it. You got to make it early in the year. There's rules surrounding when you can make a 4 75 F election just to spend maybe another second on 4 61 L. It's applicable here, but it's also applicable for owners of management companies and GP entities. I don't know if we're going to get to it again, it could be we will, so we can discuss at that point, but that was where you're limited in your ordinary business losses. First you offset business gains against business losses that you're limited in year one to $500,000 offset against investment income, capital gains and the like. And so that's kind of really important. If you're earning carry and you've got a management company that's running at a loss, you used to be able to offset completely and then 4 61 L came in kind of dodged a bullet because under the tax Cuts and Jobs Act, the maybe it was a little later than that 4 61 L was only a one year deferral.

After that it becomes an NOL under the OBVA. They were trying to put a provision that would make it a constant, so every year you would be limited to 500,000. Thankfully, that did not pass. Unfortunately with legislation, as you'll hear in the regulatory updates, once there's a piece of legislation out there that doesn't pass, guess where it goes, goes onto a shelf and next time they're doing some tax work and they're trying to figure out legislation from a tax perspective, you never know where they might pull that out again. So putting it out there, we dodged a little bit of a bullet on 4 61 L. As annoying as it is for that one year deferral, at least you get the NML on a going forward basis. Go ahead Brett,

Brett Cornell: That's a perfect segue into our next polling question. This one's pretty simple. Do you currently provide year end tax estimate to your LPs true, false or not applicable? We'll have 60 seconds to answer this question.

Bella Brickle: All right, 10 more seconds to submit your answers. Please make sure to select a response and hit the submit button. I'm now going to close the poll and share the results.

Brett Cornell: Okay, great. It's like 61% of people are providing estimates, so that's great. I think that's going to help all of your investors make some great decisions around what they need to do at tax time. Moving on. Okay, so now we'll just touch briefly on some management company and GP considerations. Want to leave some time, make sure we have enough time for SD at the end, so we'll go through these a little bit quickly. Big thing is bonus depreciation. That was welcome in the big beautiful bill. Previously, bonus appreciation was sun setting. I think it was going to be 40% for 2026. It's been reinstated back to the a hundred percent for 2025 and has been permanently extended for moving forward. Basically this bonus depreciation is just going to allow you to accelerate your depreciation year one for any fixed assets you placed in service. So computer, hardware, furniture, leasehold improvements, anything with a 15 year useful life or below.

So that's a welcome benefit. That's great. One thing on bonus depreciation just to be concerned with is the state is on the state side. A lot of states do not conform with bonus depreciation. Most notably New York, New Jersey, New York City, they don't conform. So meaning if you take a hundred percent bonus for a particular asset for the federal side, New York will make you add that back when competing in New York state taxable income and you'll just be able to take the normal depreciation over the five-year life, for example, for hardware you could consider in that situation. Section 1 79, section 1 79 basically also allows you that 100% immediate expense in the first year. So all else being equal, it would be great to take 1 79 over bonus if you're concerned about the state add-backs. However, just be concerned, just be aware that section 1 79 is not applicable if you're in a taxable loss situation.

So if you're in a taxable loss situation, you can still take bonus to accelerate depreciation, but you cannot take 1 79. Business meals not changed at all by the new tax loss. Still 50% deductible for 2025. Simcha went into 4 61 LA little bit on the last couple of slides, but that has been made, that provision has been made permanent. The excess business loss provisions have been made permanent with the big beautiful bill. So really it's a deferral in year one. It turns into an NLL in year two that's limited to 80% of your taxable income. So 4 61 L definitely need to be concerned about that. And also as it interplays with your trader funds, you could have trader income or loss subject to 4 61 L that could be netted against management company income or loss. So you need to be able to really understand how everything, all of these different streams of income will flow to you on a personal level. Some other consideration, just quickly, we won't go into these, but take a look at your tax structure for the manco. Does it still make sense to be a partnership if you're a partnership or could you think about moving to an S-corp? S-corps are a lot more rigid, so we don't typically recommend it, but in certain situations it could make sense. Also, I'll give,

Simcha David: I'll just highlight that very quickly. So there's been S-corp were kind of dead. Everybody had moved to LLCs once that became the vehicle A preference simply because like you said, it's much more flexible. S-corp can only have one type of stock, one type of share, but there's been a lot of pressure on the self-employment exception with limited partnerships. There's a bunch of cases out there we'll spend some more time in I believe next week as well. But the SOGAN cases, everybody knows about, there's tax court cases that are out there and those have become the IRS has taken a position that a limited partner that's active is not entitled to the self-employment exception tax court, believe it or not. Finally agreed with them. Those tax court cases are up for appeal at the district courts and so the legal battle is not over, but I think are we going to spend a little more time on this later on Brett? I think we're at the GP management side, so let's leave this for now. I'll get back into it at the GP management side.

Brett Cornell: Perfect. Great, thank you sim. Yeah, last note on this slide, just there are opportunities for additional deductions with employee benefit and pension plans and we have a great team here at Eisner or our prosperity team that helps some of our clients put together those types of plans. So something to consider as we approach your end for maybe maximizing some more deductions on the benefit plan side. Okay, so this is a big slide for management companies. Some of the big issues here are big opportunities. PT a obviously front and center, a lot of people taking advantage of the pastor entity tax regime for their management company and certain of their GP interest pass through tax regime really allows pass through entities like partnerships and S-corp to elect to pay their state and local tax obligations at the entity level and then pass through that deduction as an ordinary expense that you can take on your personal return and that will not be limited to the state and local tax cap.

So it's a little bit of a workaround. This has got really popular when the $10,000 salt cap was introduced with TCJA, the one big beautiful bill did increase the salt cap to, I think it's $40,000 now, but there is a phase out for high income earner. So again, this is a really huge area and something that we recommend for many of our management company and GP clients. You just got to be concerned, not concerned, but just aware that there are administrative aspects to this regime. There's going to be quarterly tax estimates that you'll need to plan for. You need to be able to make sure you can get estimated income throughout the year for your entity so you can make those payments and you got to be mindful of the elections. New York state for example, they make you make the election a year in advance.

So if you wanted to make the election for 25 for New York State, that's already passed, you'd have to make, the next opportunity you'll have is for March 15th, 2026 to make the election for 2026. But again, please talk to us, please talk to your tax advisor. PE is a huge area to pass through those expenses and take those on your personal returns quickly on 10 61, that's the three year holding period rule for applicable partnership interest. So this is applicable for your gps. If you held a GP interest and you're getting earning incentive on it, any long-term capital gains that are passed through to you, you're going to need to have held those securities for greater than three years to receive the preferential long-term capital gains rates. Again, that's applicable for a GP interest or they call it IRS skills, an applicable partnership interest. Your LPs will still benefit from any long-term capital gains that are held over one year. Just look at the preferential treatment, but for gps got a hold of it for over three years. So something to really be mindful of and the IR RSS did put out a 10 61 worksheet A that'll be on your GK ones that'll help you with that. And

Simcha David: Primarily for the carry piece. If you're a GP and you also have a capital you put capital into the fund doesn't apply to that, but that's one of the big exceptions, capital interest exception, how that applies to carry as it turns from carry to capital as a whole discussion on its own too in depth for this particular webinar. But yeah, so just keep that in mind, right? If you do have a capital account, you made an investment, you could be active, you could be a gp, but that particular part of your account is not subject to 10 61 and also if you don't get 10 61 reporting, be wary of this. You have to assume that all your long-term capital gains are greater than three years. So make sure you're getting the breakout from your investments go.

Brett Cornell: Yep, absolutely correct. Absolutely correct. Do you want to go back into the self-employment?

Simcha David: Yeah, I didn't realize it was on the next slide, but the self-employment limited partner exception, if you ask me the tax court got it wrong when you have statutory, when you're trying to understand what the statute says, it does say in the statute that the distributor share limited partners distributor share is not subject to self-employment tax. Limited partner is generally a state law limited partner tax court didn't see it that way. IRS has always hated that position. So they've always tried to take the position that if you're active, you're not limited and they got the tax court to finally say, Hey, they hung their hat on some statutory construction within 1402 A 13, which is the code section that says that and came to the conclusion that if you're active and then they did, they used the old Meyer case to come out with to look at whether a person was active deemed to be active or not fax the circumstances based.

Most managers in their management companies will be deemed to be active based on that test. So it's a functional test. Like I said, ban is currently, I dunno if that case, there were two other cases, similar cases from different tax courts that were ruled in the same way and they are now currently on appeal in two different district courts. So let's see where that ends up. I think most practitioners feel the tax court with their statutory construction, were really hanging their kind of hanging their hat on a very thin thread. And so maybe the district courts will look and see, hey, this is not the way things work. If you want this to be the rule, then you have to legislate it versus trying to look into the current law and start interpreting statutory interpretation, not based on the normal definition of what a limited partner is.

And so that's what I was saying we're be getting, some people have been starting to set their management company notes as scorps. Scorps is much more defined there. We know there's a self-employment exception if you set up as an S-corp. However, it's very, very rigid. If you wanted to bring other people in later have different, give away a piece of the management company have different terms, sharing percentages, very difficult to do with an S corp. That's why people traditionally have moved to an LP limited partnership. So you will probably hear next week as you join what the current status is or how we feel whether you could still take the position. So I'm not going to necessarily go into that. Is that coming up or not? No, I think that's it.

Brett Cornell: That's going to be next week I think in the next

Simcha David: Session. I'm going to leave that till next week. Leave you guys hanging in terms of what you should be doing currently for the self-employment exception.

Brett Cornell: Okay.

Simcha David: Thank you Brett, go ahead.

Brett Cornell: Perfect. Thank you so much, Simcha. That was fantastic. Okay, that's what we have for management companies and gps. So I'm going to kick it over to Estee now to go through some of our private equity considerations for your end.

Estee Kushner: Thanks Brett. Hi everyone. I'm Estee Kushner, a senior manager in our tax financial services practice based out of our New York office. Like Brett mentioned, we're just going to shift over into P world and go through some related considerations for year end. The first thing we'll cover are worthless securities and abandonment losses. Now as we're approaching year end, it's a good time to evaluate your portfolio and assess where all your investments are standing and how they're performing for investments that are not performing well. It's good to just be mindful that even if you plan on taking a write off or writing down the investment for a book, financial reporting purposes, the tax I follow as a whole different set of rules. So it may not be a good substantial write off for tax purposes. Now sometimes this comes as a surprise to clients who are expecting just because they wrote it off for book, they're expecting this big loss for tax purposes.

So it's good to get ahead of that for year end estimates going into 2026 before your LPs and gps are filing their tax returns to kind of know whether or not they should be expecting this loss as well. Now there are a couple of factors on the tax side to consider when writing off an investment. One is really the timing of the worthlessness and really if you can get it to be at that level of worthlessness. So you can't really expect any future value from this investment, not even a dollar. So if you are expecting that in a year or two when things kind of pick back up, you expect that you'll get some cash out of this investment that's coming to you, then that's a good indication that it's not a good write off for tax at this point. So it has to really be completely worthless.

And if you are still saying, okay, it is totally worthless, the IRS is going to look for factors. What made you decide that this is actually not worthless in this year, right? So did the investment, did they liquidate their assets? Did they see some operations? And if so, how and why are they insolvent? Are they in bankruptcy? So these are kind of leading factors that you'll want to document and memo to substantiate the validity of the worthlessness. Now another proof to say whether or not you'll see any money in the future is where are you, I guess in the hierarchy of seeing any value from this investment? Let's say there is something that might come out of it, but it goes first the preferred holders or if there's that, it goes to the creditors. So it's just to show you might get 5 million here, but we're number four or five on a list and that 5 million is going to be allocated X, Y, and z and shows that you're really getting nothing out of it. So you want to make sure that you have sufficient fast documentation for that. The timing is very important to get it right. You want to really make sure it's the right year. You might want it this year, but the question is to also ask why didn't we take it last year? Was there anything last year leading up to this situation that really should have been? This

Simcha David: Is really important because based on the IRS rules, you take the worthless stock deduction in the year, it becomes worthless and that's why we keep talking. What was the trigger in this year that made it worthless? If you mess up the years, you can continue talking about that, but go ahead.

Estee Kushner: Okay, yeah, because you don't want to mess up the years because if you take it in the wrong year, it might be too late to go back and get it in the right year. So if you decide this is the year and then a year or two or somewhere down the line, the IRS will come back and sort of audit or argue the fact that really it's not the right year and it comes out that you should have taken the loss two or three years prior to the year that you already did. Now you're not getting the loss that year that you took it because the IRS is disallowing it and now it might be too late to go back and amend that return for the year for the right year because then now it's out of statute, so now you just lost the loss. So it's just important to really keep that in mind and make sure you're getting it in the right year. I

Simcha David: Just want to re about what said, somebody said, I've had this from clients as I had yesterday, define worthless. Totally worthless is worthless. That's what it means. Totally worthless. Usually what we do to clients, I'll say somebody, I think it's worthless. I don't think I'm getting it. Okay, so then take the security and go sell it to somebody for $2. Oh no, no, no, no, I don't want to do that. Then probably it's not worthless. Go ahead.

Estee Kushner: No, that's a good point. Another point along those lines is to sell it. Maybe you could sell it for lesser value, maybe not one or $2 if you don't want to, but sell it for something just if you want to get rid of it and not have to go through the proving the worthlessness, sell it for something less amount and call it a day as an actual sale. And it's on you as the taxpayer to prove the worthlessness in that year and obviously the amount of the worthlessness. So the tax tax basis is also important.

Simcha David: And this one point on bankruptcies, people will ask this question all the time, well, the company went bankrupt, so does that mean my securities, my stock is not worthless? And the answer is generally not because many times it has to go through court and then the court has to determine that this is the value, this is what's the debt holders are going to get paid back, the debt is above the equity, and when they pass on that, then generally would be. So it really depends. There are different steps in a bankruptcy just filing the bankruptcy is not necessarily going to mean your securities are worthless because there might be something for the equity holders after everything's said and done. So be weary of that and it's a good question to run by your tax practitioner. This is a bankruptcy, is it worthless in the current year or not? And it's a very nuanced, you got to look at the docs to see what's going on.

Estee Kushner: Okay, just along the same vein, this is more on the partnership side, is the potential to take an abandonment loss on the investment. So you can just say, this investment's not worthwhile for me at this point and we want to give up our ownership and abandon this investment. So there's a couple of things facts to consider at this end. First of all, this is on the partnership side. So proving that it's a valid partnership with economic substance is obviously first and foremost, but you want to show that you have the ownership of the property, that you have the intent to abandon it and some sort of act of abandonment. So a letter, a notice, some sort of output to the company saying we hereby abandon our ownership interest. You obviously get a final K one, so that's in line with it, but just something out there that's observable.

It doesn't have to be giving up legal title. It could just be like a simple letter that states it. The advantage I'll say of an abandonment loss is that there's potential for ordinary treatment. This can get a little tricky because the one concern in order to take the ordinary treatment on the loss is whether or not there are liabilities in the investment that they're allocated to you at the time of abandonment. Now, liabilities create basically like a deem sale. It's like as if you got a cash distribution from the investment and that would result in a capital, capital loss treatment. So it's a little, I guess tough to maybe get the liabilities eliminated or relieve those liabilities at your end because IRS can still look at that as even if you gave up your liabilities, it can still be looked at maybe as a sale, as part of this whole transaction if you're going to immediately after a abandon your loss. So it's not so simple, but we're here to talk you through it, get creative and see if there's a way to actually do that. Okay, I think we're up to our next polling question. I do you expect to write if an investment for tax purposes before your end, yes or no? And now we'll have 60 seconds to answer that.

Simcha David: Abandonment can get a little bit complicated. You have to best is to kind of present some or create some sort of document currently where you're abandoning that speaks about or talks to the abandonment of the property. That's an important thing because you could say, oh yeah, I abandoned it, but there's no proof of, there's nothing there that shows the intent to abandon the affirmative act of abandonment. So that's kind of keep that in mind. It's not just me making up my mind. It's you having a contemporaneous document that says you abandoned it in the tax year versus something that you produce six months from now after the tax year. So keep that in mind.

Bella Brickle: Alright, I'm now going to close the poll and share the results.

Estee Kushner: Okay, 65% do not expect. Okay, we'll see what the 35% of you, how you can get that tax loss. Just one more point on the abandonment loss also just to be mindful of is if that investment really is deemed to be actually worthless according to what we spoke about beforehand and maybe that worthlessness should have happened in a prior year, then that also would nix the current opportunity to take that abandonment loss. So just keep that in mind. Even if you didn't take a worthlessness in a prior year, it says if you should have that was the right year to be recognized, then you won't be able to take that loss this year.

Okay, so next we'll talk briefly about section 1202, qualified small business doc. I know it's everyone's favorite topic and I guess rightfully so. There's a lot of benefit here. Also, again, in our next session in two weeks, we'll go into it a little bit in more detail and of course stay tuned. We give some QSBS update webinars throughout the year, but just going through some of the requirements and some of the bill updates. So the stock has to be issued by a domestic C corporation. It should be held by a non-corporate taxpayer, and it has to be acquired on original issuance. So no secondaries. The gross asset test and the active business requirement test also has to be met. So 80% of the issuers assets has to be used in an active trader business, and the tax basis of the assets of the issuer can't exceed the 50 or 75 million tests before and immediately after issuance.

So the 50 million test is for shares that were acquired prior to the date of enactment, and the 75 million is the increased amount for shares acquired, issued after July 4th, 2025. The holding period also changed from the bill, so now there's a minimum of a three year holding period for shares issued after the date of enactment. And then the five year holding period is for the prior to July 4th. The gain that's eligible for exclusion is limited to the greater of 15 million or 10 times the adjusted basis of the stock that's sold. The 15 million again is for the new shares after July 4th and 10 million is the original limit. That's for shares that were issued prior to July 4th. The holding period could attack in certain scenarios like a tax free exchange or transfer by gift or at death. Stock options warrants, convertible debts. These can all qualify for QSBS, but only once they're exercised or converted, and that's when the holding period starts.

If a stock is owned by pass through, then the owners can take, the partners can take their share of the gain for exclusion. Just keep in mind the contributions to a stock partnership will kill the QSB status. Carried interest also can qualify. It's a little bit of a gray area so we can talk through it, but it doesn't necessarily mean that just because it's through from a carried ownership that it doesn't qualify. If you have good QSB stock, it meets all the requirements except for the holding period. There's an opportunity you can make the section 10 45 election roll over the gain into a new QSB stock. So it has to be good QSB stock within 60 days, and then you can hold it in that investment through the remaining holding period. So you're kind of deferring the gain and the exclusion until you sell it.

There's a couple of nuances under section 10 45, but just kind of be mindful of that opportunity. And since we can't ever forget about the states, always just be mindful. The states don't always, not every state conforms to the federal, to the section 1202. So we get caught up sometimes on the federal side, and this is the exclusion, but just be mindful it might actually be taxable to the state. I think New Jersey now is another state that is going to be conforming as of 2026, so that's good news, but update for that. And here's just a summary of the updates under the big beautiful bill, the gross asset test limits the increase of 50 to 75 million that we talked about. The increase in the per issue limitation that increased from 10 to 15 million. There's a phase in increase of the gain exclusion. So now if you hold it for three years, you can get a 50% exclusion. If you hold it for four years, you get 75% and then five years is at that a hundred percent exclusion. Also, starting in 2027, there will be an adjustment for inflation for the gain exclusion and the gross asset test.

Simcha David: So, let me recap 1202 for everybody. This is an amazing benefit for those that have purchased qualified small business stock, what is qualified. So we went into some very, very high level stuff. This can be very, very nuanced. So you really have to reach out if you think you've got qualified small business stock. It's not just, oh, I have it, and that's the end of it. You really have to make sure that you are focused on the rules and how they work. But it's a very, very beneficial provision that allows you to exclude a tremendous amount of gain. And now with the OBBA, it expanded it even more. And so that's what I'm going to say on it. You can go to our website. We have a number of webinars already on 1202 for sure before the OBBA and then after the OBBA came out. And the updates very important to speak to a tax professional when you have qualified small business stock to make sure that you are treating it properly to make sure you're not doing something inadvertently to sell it at the wrong time or right before the wrong time, or to restructure it in any way. Be very careful with it. It's a great benefit, but be very careful with it. There's a lot of nuances involved. Okay, let's move to the polling question.

Estee Kushner: Okay, here's the next polling question for shares issued after 7 4 20 25. What is the minimum holding period required for gain exclusion eligibility, three years, five years, or two years?

Bella Brickle: This is our last polling question that we will be launching today. Everyone has about 30 more seconds to make sure that they select their answer and hit the submit button.

Bella Brickle: Am now going to close the poll and share the results.

Estee Kushner: Okay.

Simcha David: Okay.

Estee Kushner: 66%,

Simcha David: Not bad. It's not full at three years. Just remember that the a hundred percent exclusion is still five years, but before the OBBA, it was five years. Either you sold before five years, either you rolled up to 10 45 and invested in another QSBS or you just didn't get the exclusion. So this is one of those good provisions out of the OBBA. Okay, let's move on.

Estee Kushner: Okay, just a couple of more considerations, which we'll go through briefly. To be mindful of distributions of a property by partnership. So these are generally tax-free. So it's a regular property distribution that's coming out of a partnership. We'll cover corporation separate. They're generally tax free, but just look at the, if you're getting a property distribution and it's not a liquidating distribution from the partnership investment, so that means it's a current distribution. The tax basis and the holding period of the property does carry over from the partnership to you as the partner. And this tax basis of the property does reduce the partner's tax basis in the partnership. But just be mindful that it doesn't go below zero. So just in general, make sure to be tracking your tax basis in all of your investments. If it is a liquidating distribution, like the final distribution from the partnership, the tax basis is adjusted to equal your outside tax basis in the partnership, obviously reduced by any cash that you did receive as well.

The period still does tax though, similar to a current distribution. So you get the carry over base holding period from the partnership. There's a new form, which probably some of you might be familiar with. It's just a reporting from the IRS. It was new for 2024. And if you do get a property distribution, they just want more disclosure transparency as to where, what that tax basis is to make sure there's no gains that really should be picked up on it. So you just kind of report the investment, the tax basis if you got cash on it. And also when receiving a property distribution, just be mindful of the timing. That's not considered the sky sale. That would be actually taxable if you had made a contribution to the partnership in the previous two years, distributions from a corporation. So you look at, I guess, yeah, you would look at really how it's treated.

When cash leaves a corporation, you're looking to see if it's a taxable dividend. If it's not a taxable dividend, it'll be a return of capital to the extent that there's basis otherwise would be a capital gain. So taxable dividend is determined to the extent that there's current positive, current or accumulated earnings and profits, it will be a taxable dividend. And the partners to this effects, really, blocker Corp is set up to protect your tax exempt and your foreign LPs, right? So those are the investors presumably that will be sitting in this corporation. Now for a tax exempt partner, this dividend doesn't really matter. It doesn't really have an impact to them. But for the foreign LPs, this is considered fiap income and it would be taxable and subject to a 30% withholding. So just something to be mindful of where you're holding, if you are distributing cash to make sure that you are doing this 30% withholding or it could be less. They're part of if the foreign partner is in a treaty country. Another way to,

Simcha David: It's really important that if you've got blocker corporations in your structure to understand that nuance, that money coming out them, even if you sold it on underlying investment, if you've got multiple investments, the money coming out to the extent of earnings and profits is going to be a dividend. Not good for your offshore investors for tax exempt, but not good for your offshore investors. So something to think about. There are ways, like Asie mentioned, there's something called a liquidating distribution. If you're far enough along in your fund and you're going to be liquidating the fund within three years, you maybe can put a plan of liquidation in place and get money back out to them. Some people say, well, I'll just keep the money at the corp. If you're paying an 8% preferred return, you don't want to keep the money at the corp because it's costing you to keep it there. So something to think about. Make sure that if you have those blocker corps in your structure, the proper way to deal with them.

Estee Kushner: Okay, thank you. The next two slides really are just pretty much talking about what we just went through. So I think we'll just go and I'll hand it back to Brett to talk about the section 1446 F and wrap up.

Brett Cornell: Perfect. Thank you ee. Yeah, just wanted to touch briefly on the 1446 F withholding considerations. So here, this is really a provision that's going to be applicable to when you have a foreign person disposing of an ECI partnership interest. So ECI being effectively connected income with a US trader business. So think about your operating partnerships. So when you dispose of an ECI partnership interest, whether it's a publicly traded partnership or a non PTP, the buyer in this case. So when you're selling, the buyer actually needs to withhold the tax of 10% of the proceeds or the amount realized. So it's something that you need to really be aware of if you're planning on, if you're a foreign person or if you're even a foreign pass through that has us and non-US people in your structure, you need to be aware that this withholding requirement exists.

So if you're planning to dispose of any partnership interest, that would be considered effectively connected income. You need to understand that there would be a 10% withholding on the proceeds. There are a bunch of exceptions to this withholding. One of the main exceptions is if your sale actually generates a loss. Again, withholding is on the proceeds, not the net gain in this case. So there could be certain situations where the buyer doesn't have transparency to know that you're actually going to be selling this investment at all loss. So it's on the obligation of the seller to provide certifications, and there's various forms and timing and mechanisms for doing this, but it's the responsibility of the seller to provide a certification in this case to say, Hey, we're taking a loss on the sale of this ECI partnership interest. So there's really no withholding required. And again, there's time constraints for providing this type of certification to the buyer. So really, you want to get caught flatfooted. If you know you're going to be making sales of these types of ECI partnerships and you do qualify for an exemption, you're going to want to make sure that you have your ducks in a row and have proper communication with the buyer and the broker who's going to be facilitating that transaction. So that's just, obviously it is a complex area. There's a lot of compliance around this specific forms, et cetera. But for course of today's discussion, we're going to leave it at that high level.

So not just wrapping up, just pointing you some legislative updates, as SIM alluded to, we do encourage you to attend the next two parts of our year end tax planning webinars for funded gps. The regulatory updates will be on November 21st, same time, 12:00 PM to 1:00 PM Eastern. And then we'll wrap up with part three international and state and local tax updates on December 5th at the same time. So obviously there's a lot to talk about for legislative updates, a lot more things to consider, and we encourage you to join and to hear from us on those items and connect with us as well to do a little bit of a deeper dive. So thank you all for attending today and sim, I don't know if you have anything else you'd like to add to send us off, but

Simcha David: Just to say thank you to everybody for attending. Thank you for those who hung on past one o'clock. Really appreciate that. Thank you to Brett and to ESY for this amazing presentation. Anybody that put Q and A into the q and a widget, I've tried to answer a bunch of them. For those that we did not get to yet, we will hopefully we'll be able to send you something post the webinar in an email. Thank you all and we look forward to sharing additional webinars in the future. Thank you.

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