Reflections on the First TCJA Tax Season

Earlier this month, I had an awesome experience at Financial Research Associates’ Private Investment Funds Accounting and Tax Forum in New York City. I have attended these events for the past several years and this one was the liveliest yet thanks to folks just coming off their first Tax Cuts and Jobs Act (TCJA) tax season.

This was the most grueling tax season any of the folks in public practice had ever experienced, even for those who were practicing during the Tax Reform Act of 1986. Return preparation took anywhere from 20% – 50% longer than prior years due to working through the application of law changes along with software that didn’t incorporate all the changes.

One presenter shared their opinion that with the 1986 Act, Reagan sought out opinions from industry experts and people wrote in comments on proposed changes so that there was an element of collaboration. Conversely the TCJA was hastily put together and as a result, guidance is lacking in certain areas and technical corrections are needed in instances where the legislation isn’t in line with Congress’ intent when the TCJA was passed.

I was once again invited to present at the conference, this time on TCJA K-1 footnotes, along with the new partnership audit rules. For our Clients, the new legislation necessitating footnotes on long term capital gain and interest expense are the most relevant, and something to keep in mind as we approach year-end.

The perceived inequity of permitting carried interest (profits interest granted to Sponsors/GP’s in return for the performance of investment management services) to be treated as long term capital gain has spurred a multitude of proposed legislation over the last 10+ years. The TCJA addressed this through the enactment of Section 1061 which generally changed the holding period for long term capital gain treatment on carried interest from one to three years.

Even more interesting is that for section 1231 gain for disposition of real assets, the carried interest holding period does not have to be re-characterized between long and short term, even if the asset was held less than three years, because of a disconnect in the code that would take an act of Congress to fix.

Prior to the TCJA, partnerships could generally deduct all interest expense. The new 163(j) rules have increased the cost of debt financing by limiting the interest expense deduction to 30% of adjusted taxable income plus business interest income.

We see another interesting application for real estate partnerships who can elect out of these limitations if they adopt the Alternative Depreciation System which generally increases the number of years over which assets are depreciated.

As the tax and compliance landscape becomes more complex, one way to put your Fund in the best position to weather this brave new world is with consistent, high quality financial reporting. We appreciate our valuable clients who have entrusted us to provide such reporting and look forward to continuing to grow together.

 

Erica England, C.P.A

Redwood’s Chief Accounting Officer Erica England C.P.A. has 10+ years of experience working in the private equity industry and is always happy to discuss how Redwood could help you with your fund administration needs. Reach out to Erica at erica.england@redwoodrea.com to learn more.

 

 

Neither Redwood nor any of its affiliated entities offer or provide any legal, accounting, or other advice that requires a professional license. None of the materials in this post or any related materials are intended to be or should be considered legal, accounting, or similar advice. No one receiving these materials may rely on them as a substitute for appropriate professional advice. Redwood strongly encourages and advises anyone receiving these materials to consult with their own independent attorneys, CPAs, and other professionals in order to ensure that any actions taken in connection with the materials complies fully with all applicable laws, rules, and regulations.