Three things that decide the tax bill
A fund is rarely one taxpayer. The fund, the general partner, and the management company each file differently.
Carried interest needs a three year holding period. Short of that the gain is taxed at ordinary rates, up to 17 points more than the 20 percent long term rate.
New York City taxes the fund and the management company differently, and the city audits the split.
What private equity accounting services cover
Private equity accounting services are the fund level books and the partnership tax work for a fund and the entities around it. Four pieces of work:
Capital accounts
Each investor's running balance of what they put in, what they have been allocated, and what they have been paid.
Waterfall allocations
Profit split between investors and the GP, run to the model the partnership agreement sets.
Valuation support
The schedules behind a fair value mark, for holdings that no market prices.
Returns and investor reporting
The filings that report all of it to limited partners.
Two things separate this from ordinary business accounting.
The unit of measurement is the investor, not the entity. A fund with 40 limited partners produces 40 sets of numbers out of one set of books.
The deliverable is a Schedule K-1, not a tax return. It falls due against someone else’s April deadline, which is why investors judge a fund on timing as much as on accuracy.
We work with buyout and growth funds, venture funds, real estate funds, funds of funds, and single asset SPVs, alongside the management companies and GP entities beside them. Emerging managers and established sponsors come to us for the same reason: the structure grew past the person who was handling it.
This is accounting and tax work. We do not audit funds we keep books for, and we do not hold or move investor capital.
The firm behind the fund work, in five numbers.
12+
years serving New York City
150,000+
returns filed
Serving clients in
all 50 states
5 star
rated on Google, Yelp, and Thumbtack
Open
evenings and weekends
The entities in a fund structure
A fund is rarely one taxpayer. Three entities file as standard, and two more appear in many structures.
The fund
the limited partnership or an LLC taxed as a partnership, holding the investments. It files Form 1065, issues a Schedule K-1 to every investor, and generally pays no federal income tax at entity level itself.
The general partner
the entity holding the carried interest, meaning the GP's share of the fund's profits rather than a return on money it invested. Those allocations keep their capital gain character coming out of the fund, but the three year holding period rule below applies to them.
The management company
the entity billing the management fee. That fee is ordinary income, it carries the payroll, and where the entity is taxed as a partnership it usually falls inside the New York City unincorporated business tax even though the fund itself does not.
Blockers and feeders
corporations placed above or below the fund so that tax exempt and non US investors do not receive income they cannot take.
SPVs and parallel funds
separate entities for a single deal or a single investor class, with return and K-1 requirements determined by each entity's federal tax classification.
What private equity fund administration includes
The recurring engagement, from capital call through investor statement.
Capital calls and distributions
notices issued, cash tracked against commitments, and drawn versus undrawn kept current for every investor.
Investor capital accounts
maintained on the basis your partnership agreement specifies, and reconciled to the fund's books rather than kept in a parallel spreadsheet.
Waterfall and preferred return calculation
the distribution model built once, then run each period so the split between investors and the GP is traceable back to the agreement, whether the agreement runs a European whole fund waterfall or an American deal by deal one.
Valuation support under ASC 820
the fair value standard. The schedules and inputs behind a mark, prepared so your auditor and your investors can follow how the number was reached.
Real estate fund accounting
the same capital account and waterfall work, at property level, for sponsors holding buildings rather than companies.
Management company books
the fee entity's own ledger, payroll, and expense allocation, kept separate from the fund. Fee offsets and expense allocation are the two places an LPA compliance question usually starts when an investor looks closely.
Investor reporting
quarterly statements and partner capital account statements, the PCAP your investors already expect, in the format they already receive.
Free consultation
How many entities are in your structure?
Tell us the fund, the GP, the management company, and anything else that files. We will scope it and quote before any work starts.
The tax work for the fund, the GP, and the partners
A fund produces three sets of filings: the entity return, one K-1 per investor, and the partner level returns behind them. Private equity tax services are scoped and quoted separately from the fund accounting.
Form 1065 and Schedule K-1
the fund return and one K-1 per investor, with tax basis capital reported for each.
Schedules K-2 and K-3
the international detail investors need to claim foreign tax credits. A fund with any foreign holding or any foreign investor will rarely meet the domestic filing exception, so plan on producing them.
Blocker structures
modeling and filing for the corporations that stop unrelated business taxable income reaching tax exempt investors and effectively connected income reaching non US investors.
Benefit plan investor tracking
where pension and other ERISA plans invest, the fund has to know what share of each class they hold. The threshold is a legal question for fund counsel, but the number comes from the investor register we maintain.
Withholding on foreign partners
section 1446(a) withholding on effectively connected income at the partner’s highest rate, plus the 10 percent withheld under section 1446(f) when a foreign investor transfers an interest. Offshore holdings can add PFIC and CFC reporting, and payments to foreign investors can add FDAP withholding, each of which is its own filing.
Section 754 elections
the basis adjustment that follows a secondary transfer or a redemption, and the tracking it commits the fund to for years afterwards.
Secondaries and continuation vehicles
the reporting that follows when an investor sells its interest or the fund rolls assets into a new vehicle. A transfer mid year splits the year’s allocations between the seller and buyer, and it can trigger both the withholding above and a section 754 adjustment at the same time.
Partner level returns
the individual and entity returns for GPs and principals, prepared by the same team that produced the K-1.
The investment adviser AML rule, from January 2028
FinCEN has delayed it twice and covered advisers are exempt from every requirement until then, but it applies to exempt reporting advisers as well as registered ones, which is the point managers miss when they assume exempt means exempt. The investor register already holds the data for it.
Why carried interest can be taxed as short term gain
A carried interest is a profits interest, and for tax years beginning after 2017 it has needed a three year holding period rather than one.
The waterfall sets how much carry there is, in four tiers:
Return of capital. Investors get back what they contributed.
Preferred return, also called the hurdle. at the rate the partnership agreement specifies.
GP catch up. bringing the GP up to its share of profits to date.
The split. most often 80 to the investors and 20 to the GP.
A European waterfall runs this once the whole fund has returned capital. An American waterfall runs it deal by deal, which can trigger a clawback later, so the model has to match the agreement rather than the market convention.
Section 1061 determines what that 20 is worth after tax. Certain net long term capital gain allocated on an applicable partnership interest is recharacterized as short term unless the asset behind it was held more than three years. A holding period clearing one year but not three used to be enough. It no longer is.
Long term capital gain is taxed at 20 percent and short term at ordinary rates, up to 37 percent, with the 3.8 percent net investment income tax applying either way. At the top rate that is a 17 point difference on the whole allocation.
Three points cause the most trouble.
It tests the asset, not only the interest
The rule looks at how long the partnership held the asset it sold, not only how long the GP has held its interest.
A qualifying capital interest is exempt
Money the GP invested alongside investors falls outside the rule when its allocations meet the regulatory requirements.
S corporations do not qualify for the corporate exception
That is a problem for structures built before the final regulations were issued in January 2021.
Where your investors create state and city filings
Investors spread across many states turn one federal return into a stack of state ones.
A fund with New York source income files Form IT-204 and may owe the annual filing fee. How partnerships are taxed in New York covers the mechanics. On top of that:
Nonresident partner withholding
The fund may have to remit estimated tax for nonresident individual and corporate partners rather than leaving them to it.
Composite returns
Filed where investors would rather file once than twenty times.
Apportionment
Wherever the fund has source income, which for flow through portfolio companies means every state they operate in.
The state work can outweigh the federal.
New York City treats the fund and the management company differently. Income from trading purely for the taxpayer’s own account is excluded from the unincorporated business tax under the city’s investment activity rules. Fee income earned for managing other people’s money is a different matter, and the management company usually pays.
A fund holding controlling stakes in operating companies is where that line gets tested, because the exclusion is fullest for an entity engaged only in buying, holding, and selling for its own account. The city has audited the split for years, and getting it wrong costs 4 percent of the wrong number every year until it is found.
The investor reporting calendar
Fund CFOs judge private equity accounting services on dates.
- 01
Year end close
Books closed, capital accounts rolled forward, and valuations documented.
- 02
Audited statements, where the fund is audited
An adviser relying on the custody rule audit provision generally has 120 days from fiscal year end, or 180 days for a qualifying fund of funds, to get them to investors.
- 03
Fund return filed or extended
Calendar year funds file by March 15, and Form 7004 moves that to September 15.
- 04
K-1 estimates to investors
Where the return is extended, investors still need a number before their own April deadline.
- 05
Final K-1s and K-3s issued
Funds of funds finish last, because they cannot close until every upstream K-1 is issued.
- 06
State and composite filings
Filed on each state's own calendar, which does not always match the federal one.
What private equity accounting services cost
Priced on the structure rather than by the hour. What a private equity accounting firm should be quoting against:
- 1Number of entities, counting the fund, the GP, the management company, blockers, and any SPVs.
- 2Investor count, which drives K-1 volume more than fund size does.
- 3Whether the structure includes foreign or tax exempt investors, since both add filings.
- 4Number of states the fund and its portfolio companies touch.
- 5Whether fund accounting runs all year or the engagement is compliance only.
These are the factors, not a quote. Private equity accounting services are scoped and priced per structure before any work starts.
What our clients say
“We have full mobility in all 50 states... Last year we had 49 states. That’s not to say we have a thousand clients in every state, but we have at least one.”
“Naturally, my tax returns were quite complicated due to the number of states that I was sent to work in... I also received some K-1 income and had quite a few questions about that. The team here helped turn around my request extremely quickly and helped me understand the outcome.”
Related services
This page is general information, not advice for your circumstances. Because fund tax outcomes turn on your partnership agreement and your structure, speak to a CPA before acting on anything here.
Free consultation
Talk to a private equity CPA
Tell us how many entities are in the structure, how many investors receive a K-1, and where your portfolio companies operate. We will scope it and quote before any work starts.
