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Posted by Claudia Mullen on May 16, 2020 8:25:00 AM

Connecting the jigsaw puzzleIt might be time for a check-in with your internal tax department. Private equity (PE) and venture capital (VC) fund activity comes with some time-intensive tax reporting requirements, from managing the completion and delivery of the Schedule K-1 to tax obligations for the funds themselves. If it’s been a while since your firm last evaluated its tax function, you may want to consider a quick self-assessment.

Fund-specific tax issues tend to appear around certain types of reporting requirements. The following questions may help PE and VC firms with their tax resources evaluation.

What Does the Process for Our Schedule K-1s Look Like? Do We Have Timely Delivery?

PE or VC funds organized as flow-through entities for tax purposes are required to provide investors with a Schedule K-1 package, which may include both federal and state K-1s along with possible reporting on federal and state withholding taxes. Investors need the Schedule K-1 for their own tax reporting, and there are usually stipulations within the limited partnership agreement that the PE or VC firm is to supply the Schedule K-1 to the investors by a set date (usually in late spring or early summer).

Depending on the size of your PE or VC firm and the complexity of its funds, you may have a significant volume of investors who need their Schedule K-1s. (We’ve worked with firms that have had to deliver thousands.) If completion of the Schedule K-1s is running behind, the firm runs a significant risk of violating its limited partnership agreement provision, not to mention drawing the ire of its investors who have their own compliance concerns to manage.

PE and VC firms should evaluate their current processes to meet their Schedule K-1 delivery deadlines to determine what works well and where improvements are needed.

What Resources Are Needed to Complete Accurate Schedule K-1s?

Aside from the logistics of delivery to investors, Schedule K-1s are cumbersome to complete. Disclosure requirements demand close collaboration with portfolio companies and their advisors. Tax-exempt investors will need to know if the fund may be generating unrelated business taxable income (UBTI). Tax reform brought new considerations for domestic investors related to the pass-through deduction under Section 199A (which allows a deduction for a percentage of qualified domestic business income from pass-through entities) and business interest deduction limitations under Section 163(j). Overseas investors will need to know information about whether the income generated from their PE or VC investment is considered effectively connected income (ECI) or subject to U.S. withholding tax.  These complexities require attention and can be time-consuming to implement and monitor.

PE and VC funds should consider different approaches to manage the impact these complexities have on their operations, including the use of standard templates and workpapers, technology and additional staffing resources.

How Is Investor Data Being Managed?

PE and VC firms must manage a significant volume of investor demographic data as part of their U.S. tax compliance. Not only must the data be efficiently and effectively managed for Schedule K-1 delivery, but it also informs other areas of investor tax compliance, including meeting U.S. federal and state withholding requirements and for compliance with the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS). PE and VC firms need to have processes in place to refresh this information as needed or required by the various tax authorities and to ensure data integrity over the multiple systems that may handle investor demographic data.

Are We Meeting All of Our Tax Requirements for Our Funds?

Overseas investors, tax-exempt investors, and desired investor and general partner dynamics can create unique holding structures with complex domestic and international tax reporting requirements. Internal tax departments must be able to accommodate a large volume and variety of filings for their funds. They should have in place robust processes to identify the filings required and manage the workflow, often dealing with multiple service providers along the way.

How Much of Our Resources Are Needed to Do Transaction-Level Work?

Realization transactions, such as dividend recapitalizations and sales, demand a high amount of attention to ensure that the taxable income related to the transaction is allocated properly amongst the investors. The PE or VC firm will also need to ensure that any required federal or state tax withholding that results from the transaction is withheld from the proceeds before distribution to the investors and remitted to the relevant taxing authorities in a timely manner. The time span from initial planning of such a transaction to closing is often relatively short, requiring tax departments to re-focus their attention away from other work. This can be straining to already stretched resources, especially around key compliance deadlines.

Are We Leveraging Technology to Create Efficiencies?

PE and VC firms are increasingly recognizing that simply adding more staffing resources to their internal tax departments is not sufficient. Instead, they are looking for technology solutions to automate repetitive or time-consuming manual tasks or to replace their traditional workpaper schedules. Others are pushing more steps of the tax compliance process to their external service providers, who may already have sophisticated technology solutions in place to handle these tasks.

PE and VC firms will need to strategically evaluate their options to utilize technology in their tax function and consider the integration of any potential solution with their finance systems.

What Do We Do If Our Assessment Indicates Tax Department Inefficiencies?

The above assessment only highlights the fund-specific work that may be causing issues. Internal tax departments may also be at capacity with managing portfolio company tax information reporting, or be short-staffed due to turnover, training or retention issues on the team. How you answered the questions above may indicate it’s time to look for creative solutions to support your internal tax function and all its various obligations.

An Approach That Works For You: A Case Study in How Co-Sourcing Improves Tax Function

Facts and circumstances are everything when it comes to optimizing your resources, and in some cases, your PE or VC firm may have limited options on the table. Take the following example.

Our team worked with a PE firm that had to file more than 1,000 annual tax returns and issue more than 3,000 K-1 packages for its investors. The PE firm’s management company limited the firm’s ability to hire additional internal tax personnel.

Co-sourcing and interim staff support helped the PE firm meet its filing obligations and work within the staffing parameters set by its management company. Our team provided two additional staff members on an as-needed basis. Over time, the support grew as the firm needed it. We were able to provide the equivalent of four full-time professionals who helped the firm with its preparation and review of tax workpapers, review of tax returns prepared by third-party service providers, quarterly investor estimates, withholding calculations and state waiver collection, FATCA and CRS compliance, and more.

For More Information

For more information about the tax resource solutions that may work best for your situation, please contact us.


Claudia-Mullen-Web ColorClaudia Mullen is a Tax Managing Director and is a member of the Private Equity & Venture Capital Practice. She can be reached at 401.626.3241 or




© Copyright 2019 CBIZ, Inc. and MHM. All rights reserved. Use of the material contained herein without the express written consent of the firms is prohibited by law. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

Tags: Claudia Mullen, Private Equity & Venture Capital, PE/VC, co-sourcing, tax co-sourcing

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