Author Topic: CPA time spent per hedge fund K-1  (Read 1320 times)

MustacheAndaHalf

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CPA time spent per hedge fund K-1
« on: March 06, 2023, 08:09:10 PM »
I began investing in hedge funds last year, which means I expect to receive IRS form K-1 in the future.  Most of these are "investor" type hedge funds which buy assets and hold them for years, seeking to profit off the higher value when sold.  Since these funds are still raising capital, they are not ready to sell assets and will probably not be filing form K-1 this year.  Here is the Investopedia explanation for those who are curious, and one of the clearer explanations from a CPA firm.
https://www.investopedia.com/ask/answers/09/k-1-tax-form.asp
https://kaufmanrossin.com/blog/investment-funds-2021-tax-planning-means-preparing-for-expanded-k-1-reporting/

I am a limited partner - an investor - of these hedge funds.  I am curious to know how much time CPAs spend processing the average IRS form K-1.  But I think it is more fair to ask for the range of hours needed for most cases (5 to 20 hours?).

SeattleCPA

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Re: CPA time spent per hedge fund K-1
« Reply #1 on: March 07, 2023, 05:10:25 AM »
I think you'll get a K-1 even if its only to show there's almost no activity.

Also this comment: Your K-1 (K-1s?) and the companion K-3 may not be as complicated as the hedge fund K-1s I shudder to see come in. The typical K-1 from a partnership is like 3 pages. The actual standard form with the boxes. The thing that sort of resembles a W-2. Kind of. And then another couple of pages with additional statements you need and the Section 199A info. That's not too bad to handle for an experienced practitioner. Maybe 15 minutes?

The hedge fund K-1s (and K-3s too a little bit...) that I'm talking about are 50 to 75 pages in length. May source income to a bunch of different states. Probably other countries. It can take hours for a veteran tax practitioner to get data from a single K-1 like that into the 1040. And maybe into the state returns where you now have to file because if the partnership has nexus in a state you have nexus. (Sidebar tip: Pay attention to any offers to include your state activity in a composite return.)

This is an example number, but you could be $1K to 2K per K-1 pretty easily? Plus maybe $500 to $1K per nonresident state return?

P.S. He's retired now but I had a client who was one of the general partners in several hedge funds. So he had interests in all the funds the hedge fund manager operated. This was years ago. I think we at that time charged $1500 per K-1. But he would tell me that new hedge fund investors were often surprised and complained by how their tax prep costs exploded once they got into a hedge fund. For what that's worth.

MustacheAndaHalf

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Re: CPA time spent per hedge fund K-1
« Reply #2 on: March 07, 2023, 07:22:25 AM »
I think you'll get a K-1 even if its only to show there's almost no activity.
Most hedge funds have an initial investment, followed by capital calls for the rest in later months or years.  When raising funds, they could literally have no investment activity.  If that generates a K-1 I'll find out later this year.


Also this comment: Your K-1 (K-1s?) and the companion K-3 may not be as complicated as the hedge fund K-1s I shudder to see come in. The typical K-1 from a partnership is like 3 pages. The actual standard form with the boxes. The thing that sort of resembles a W-2. Kind of. And then another couple of pages with additional statements you need and the Section 199A info. That's not too bad to handle for an experienced practitioner. Maybe 15 minutes?
You may have encountered "self-directed IRAs" (SDIRAs).  Unlike Schwab or Vanguard, SDIRAs allow investment in hedge funds, which is how some of my hedge fund investments have occurred.  I'm aware UBIT could be a problem, and invested when GPs had a reasonable guess UBIT wouldn't occur (no guarantees).

Since K-1s are new to me, I will probably spend hours digging into one at some point.  The better I understand the work I'm hiring a CPA to perform, the better I can be at selecting and communicating with CPAs.


The hedge fund K-1s (and K-3s too a little bit...) that I'm talking about are 50 to 75 pages in length. May source income to a bunch of different states. Probably other countries. It can take hours for a veteran tax practitioner to get data from a single K-1 like that into the 1040. And maybe into the state returns where you now have to file because if the partnership has nexus in a state you have nexus. (Sidebar tip: Pay attention to any offers to include your state activity in a composite return.)
I'm living abroad and not a resident of any U.S. state, which could eliminate one source of complexity.  Maybe it's better to brace myself for at least one complex K-1 and be happy if it never happens.

By your sidebar, do you mean a CPA may file a composite return for multiple K-1s, reducing the overall cost of tax preparation?


This is an example number, but you could be $1K to 2K per K-1 pretty easily? Plus maybe $500 to $1K per nonresident state return?
Based on a random quote I don't trust, I'm guessing 5-10 simple K-1s are the same price as one complex K-1.  My random, naive guess is $5,000 in CPA fees (simple + complex = $2k to $4k, a few states $1k to $2k, round up to $5k) during busy years.


P.S. He's retired now but I had a client who was one of the general partners in several hedge funds. So he had interests in all the funds the hedge fund manager operated. This was years ago. I think we at that time charged $1500 per K-1. But he would tell me that new hedge fund investors were often surprised and complained by how their tax prep costs exploded once they got into a hedge fund. For what that's worth.
Maybe I should just assume each hedge fund will generate sevearl K-1s, so that I can be pleasantly susprised if any generate a lone composite K-1.

In 2020, I bought various individual stocks in my Roth IRA.  One of those individual stocks actually had UBIT income, which came as a surprise to me.  So I owed tax on the income that wasn't related to the business, and to pay Vanguard's fees in handling form K-1.  Maybe I can look that up and see the length of K-1 and fees charged.

Sibley

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Re: CPA time spent per hedge fund K-1
« Reply #3 on: March 07, 2023, 02:53:54 PM »
Long ago when I did tax returns with K-1s, they ranged from 30 minutes for the most basic and up. If ALL you're doing is plugging in some capital gain info or interest/dividends, that's easy. I didn't work on the hard ones though.

MustacheAndaHalf

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Re: CPA time spent per hedge fund K-1
« Reply #4 on: March 07, 2023, 07:14:54 PM »
Long ago when I did tax returns with K-1s, they ranged from 30 minutes for the most basic and up. If ALL you're doing is plugging in some capital gain info or interest/dividends, that's easy. I didn't work on the hard ones though.
Would that 30 min apply to me if I'm not a CPA but willing to learn about K-1s?  If you're also not a CPA, I'd be curious how much one-time learning was required (or if you're a CPA, maybe your estimate of lay people learning IRS form K-1).

Sibley

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Re: CPA time spent per hedge fund K-1
« Reply #5 on: March 07, 2023, 09:01:21 PM »
Long ago when I did tax returns with K-1s, they ranged from 30 minutes for the most basic and up. If ALL you're doing is plugging in some capital gain info or interest/dividends, that's easy. I didn't work on the hard ones though.
Would that 30 min apply to me if I'm not a CPA but willing to learn about K-1s?  If you're also not a CPA, I'd be curious how much one-time learning was required (or if you're a CPA, maybe your estimate of lay people learning IRS form K-1).

I was using professional tax software which was designed to accommodate K-1s. I sincerely doubt that the software available to individuals is going to be as easy. Aside from that, it entirely depends on what is on the K-1. If it's all capital gain/loss, interest, dividends, etc then yeah, it's easy because it just get lumped in with the rest of those items. Ordinary business income? Potentially much more complex. Royalties? Same. But you could have multiple states, etc that complicate things as well.

The other thing is you should just assume you'll be filing extensions every year. The k-1s often didn't show up until mid-March or later from my memory, though I do not know if they had to be that late or if someone was just slow.

You should pay attention to what SeattleCPA says. I was staff, and it was a long time ago. They actually do them currently. Believe them.

SeattleCPA

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Re: CPA time spent per hedge fund K-1
« Reply #6 on: March 08, 2023, 08:33:01 AM »
Most hedge funds have an initial investment, followed by capital calls for the rest in later months or years.  When raising funds, they could literally have no investment activity.  If that generates a K-1 I'll find out later this year.

A partnership owes a tax return if it has any income, deduction or credit. So it's really unlikely these would all be zero.

The other thing to know: The penalty for not or belatedly filing a partnership return is $220 per month per K-1. A partnership with a 1000 partners, then, incurs a $220K monthly penalty if it should have filed a 1065 but didn't. Obvious response by CPA firm and general partners: File a return so you don't incur giant penalties.

Quote
You may have encountered "self-directed IRAs" (SDIRAs).  Unlike Schwab or Vanguard, SDIRAs allow investment in hedge funds, which is how some of my hedge fund investments have occurred.  I'm aware UBIT could be a problem, and invested when GPs had a reasonable guess UBIT wouldn't occur (no guarantees).

That's really a separate issue. More specifically whether an exempt organization (like your IRA) needs to file a 990T tax return because it has unrelated business income. BTW a K-1 is one of the two common ways to put taxable-to-the-IRA income inside an IRA and trigger a requirement for the IRA to file its own tax return. But again not the same thing as a complicated K-1.

BTW, we do do 990-Ts. One of the CPAs in the firm is a 990 expert.

Quote
I'm living abroad and not a resident of any U.S. state, which could eliminate one source of complexity.  Maybe it's better to brace myself for at least one complex K-1 and be happy if it never happens.

I'm going to clear up a couple more misunderstandings. And then get going on my work day.

But first, you very possibly did not sever residency with your former state by moving to, for example, Portugal. That state may still see you as a resident. We encounter this occasionally. The way to sever residency with state A may be to move to state B and establish residency there. (Though I will say that we had situation where taxpayer moved from State A to State B and then to foreign country. And State A some years later argued taxpayer still had residency in State A. By that time, the connections to State B were so old and the documentation so spotty, taxpayer never could prove to State A's satisfaction that the residency had ended. I think that was ten years ago. We probably still file a return in State A. I don't remember. (Obviously probably but another way to sever residency would be to renounce US citizenship or turn in green card and then pay the exit tax.)

And then the second thing to note: If you're a partner in a partnership that operates in say 20 states, the partnership typically doesn't pay the state income taxes on the profits they earn in those 20 states. Rather, partners do. (In language of  tax accounting, the partnership creates state income tax nexus for the partners. There ways around this. Some partnerships will file a composite state income tax return and pay a worst-possible-case estimate of the state income tax. Also a partner may be below the threshold to pay taxes. But that's tricky. FWIW, I've had a client (a hedge fund guy) argue with California about a state K-1 with $12 of income. And same client got into an argument with Massachusetts where MA argued (erroneously) that client had earned $200 in state through a hedge.

Like I said in the other thread, this stuff can get complicated.

P.S. I did a blog post years ago about the surprises taxpayers encounter when investing multistate. It might include info new to some here so here's link: https://evergreensmallbusiness.com/partnership-tax-consequences-financial-advisor-didnt-tell/
« Last Edit: March 08, 2023, 08:37:11 AM by SeattleCPA »

MustacheAndaHalf

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Re: CPA time spent per hedge fund K-1
« Reply #7 on: March 09, 2023, 06:01:57 AM »
But first, you very possibly did not sever residency with your former state by moving to, for example, Portugal. That state may still see you as a resident. We encounter this occasionally. The way to sever residency with state A may be to move to state B and establish residency there. (Though I will say that we had situation where taxpayer moved from State A to State B and then to foreign country. And State A some years later argued taxpayer still had residency in State A. By that time, the connections to State B were so old and the documentation so spotty, taxpayer never could prove to State A's satisfaction that the residency had ended. I think that was ten years ago. We probably still file a return in State A. I don't remember. (Obviously probably but another way to sever residency would be to renounce US citizenship or turn in green card and then pay the exit tax.)
Residency can be a judgement call, and California's FTB is aggressive.  Among the things I recall being relevant:
- real estate owned in the state
- ties to the state (visiting friends, long stays, etc)
- personal property left behind (or in rental facility)
- voting for state offices (expats can only vote for President)
(various others I forgot)

One tactic is to catch taxpayers moving back into California, and claim their entire time abroad was a temporary move.  They might argue the person was actually a resident and owed back taxes for the missing years.  I'm aware of that trap, and haven't been back.

I don't know if my hedge funds will have California income, but I'm fairly certain they will have income in other states.


And then the second thing to note: If you're a partner in a partnership that operates in say 20 states, the partnership typically doesn't pay the state income taxes on the profits they earn in those 20 states. Rather, partners do. (In language of  tax accounting, the partnership creates state income tax nexus for the partners. There ways around this. Some partnerships will file a composite state income tax return and pay a worst-possible-case estimate of the state income tax. Also a partner may be below the threshold to pay taxes. But that's tricky. FWIW, I've had a client (a hedge fund guy) argue with California about a state K-1 with $12 of income. And same client got into an argument with Massachusetts where MA argued (erroneously) that client had earned $200 in state through a hedge.
For some reason I pictured that hedge fund guy as the heroic figure in a movie, yelling out "de minimus, m*****f******!" as he guns down bad guys.

I've heard celebrities take the same approach towards nuisance lawsuits - they'd rather spend $50,000 on lawyers than pay off someone suing them for $10,000.  Sounds similar to the hedge fund guy you mentioned, but applied to state governments.

SeattleCPA

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Re: CPA time spent per hedge fund K-1
« Reply #8 on: March 10, 2023, 05:54:24 AM »
But first, you very possibly did not sever residency with your former state by moving to, for example, Portugal. That state may still see you as a resident. We encounter this occasionally. The way to sever residency with state A may be to move to state B and establish residency there. (Though I will say that we had situation where taxpayer moved from State A to State B and then to foreign country. And State A some years later argued taxpayer still had residency in State A. By that time, the connections to State B were so old and the documentation so spotty, taxpayer never could prove to State A's satisfaction that the residency had ended. I think that was ten years ago. We probably still file a return in State A. I don't remember. (Obviously probably but another way to sever residency would be to renounce US citizenship or turn in green card and then pay the exit tax.)
Residency can be a judgement call, and California's FTB is aggressive.  Among the things I recall being relevant:
- real estate owned in the state
- ties to the state (visiting friends, long stays, etc)
- personal property left behind (or in rental facility)
- voting for state offices (expats can only vote for President)
(various others I forgot)

One tactic is to catch taxpayers moving back into California, and claim their entire time abroad was a temporary move.  They might argue the person was actually a resident and owed back taxes for the missing years.  I'm aware of that trap, and haven't been back.

I don't know if my hedge funds will have California income, but I'm fairly certain they will have income in other states.


And then the second thing to note: If you're a partner in a partnership that operates in say 20 states, the partnership typically doesn't pay the state income taxes on the profits they earn in those 20 states. Rather, partners do. (In language of  tax accounting, the partnership creates state income tax nexus for the partners. There ways around this. Some partnerships will file a composite state income tax return and pay a worst-possible-case estimate of the state income tax. Also a partner may be below the threshold to pay taxes. But that's tricky. FWIW, I've had a client (a hedge fund guy) argue with California about a state K-1 with $12 of income. And same client got into an argument with Massachusetts where MA argued (erroneously) that client had earned $200 in state through a hedge.
For some reason I pictured that hedge fund guy as the heroic figure in a movie, yelling out "de minimus, m*****f******!" as he guns down bad guys.

I've heard celebrities take the same approach towards nuisance lawsuits - they'd rather spend $50,000 on lawyers than pay off someone suing them for $10,000.  Sounds similar to the hedge fund guy you mentioned, but applied to state governments.

So since we're now way down the rabbit hole...

I think the issue with expats is some states say if you're a US citizen and your last state of residency was X, you're still a resident of X for tax purposes if you're still a citizen. I.e., some (and maybe all, I don't know) apply the same "rules" and "thinking" as applies to citizenship. Another maybe better way to say the same thing: If you're a US citizen, you must logically have a state of residency.

Also state bureaucracies can be real bullies. Especially to out of state low power taxpayers. In the case I'm thinking about, the state pointed to things like the individual in question had never officially surrendered her or his voter registration. They hadn't voted for years and years. But that part didn't matter. And the person had allowed an ailing, elderly parent to use an old car. Gosh, they made hay on that issue too.

Regarding the materiality thing, at a practical level that's true. I assume the reason people with small investments in multistate partnerships don't get snared by nexus all the time is, the state doesn't have the resources or financial incentives to care.

One final comment--and the state in question was not California but I think they'd behave this way too--but the professionals involved all thought the taxpayer was right and the state was wrong. I.e., the tax accountants including me and the tax attorneys all thought taxpayer could not still be a resident of state A when he'd spent a decade living, working, voting in state B. But after consulting in-state tax attorneys who'd be the ones to litigate the issue, the conclusion was going to court would cost $40K and that was about what the taxpayer owed in back taxes. And the optimal thing was to just pay the state A rather than pay the lawyers.

Professionally, I've seen a handful of really disgusting, disturbing actions on the part of federal and state agencies. Mostly state agencies if I'm fair. (The IRS btw is actually a very taxpayer-friendly organization compared to some state tax agencies and other federal agencies.) But the bullying a state agency did in the case I've vaguely described is high on the list.



MustacheAndaHalf

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Re: CPA time spent per hedge fund K-1
« Reply #9 on: March 10, 2023, 07:27:55 AM »
But first, you very possibly did not sever residency with your former state by moving to, for example, Portugal. That state may still see you as a resident. We encounter this occasionally. The way to sever residency with state A may be to move to state B and establish residency there. (Though I will say that we had situation where taxpayer moved from State A to State B and then to foreign country. And State A some years later argued taxpayer still had residency in State A. By that time, the connections to State B were so old and the documentation so spotty, taxpayer never could prove to State A's satisfaction that the residency had ended. I think that was ten years ago. We probably still file a return in State A. I don't remember. (Obviously probably but another way to sever residency would be to renounce US citizenship or turn in green card and then pay the exit tax.)
Residency can be a judgement call, and California's FTB is aggressive.  Among the things I recall being relevant:
- real estate owned in the state
- ties to the state (visiting friends, long stays, etc)
- personal property left behind (or in rental facility)
- voting for state offices (expats can only vote for President)
(various others I forgot)

One tactic is to catch taxpayers moving back into California, and claim their entire time abroad was a temporary move.  They might argue the person was actually a resident and owed back taxes for the missing years.  I'm aware of that trap, and haven't been back.

I don't know if my hedge funds will have California income, but I'm fairly certain they will have income in other states.


And then the second thing to note: If you're a partner in a partnership that operates in say 20 states, the partnership typically doesn't pay the state income taxes on the profits they earn in those 20 states. Rather, partners do. (In language of  tax accounting, the partnership creates state income tax nexus for the partners. There ways around this. Some partnerships will file a composite state income tax return and pay a worst-possible-case estimate of the state income tax. Also a partner may be below the threshold to pay taxes. But that's tricky. FWIW, I've had a client (a hedge fund guy) argue with California about a state K-1 with $12 of income. And same client got into an argument with Massachusetts where MA argued (erroneously) that client had earned $200 in state through a hedge.
For some reason I pictured that hedge fund guy as the heroic figure in a movie, yelling out "de minimus, m*****f******!" as he guns down bad guys.

I've heard celebrities take the same approach towards nuisance lawsuits - they'd rather spend $50,000 on lawyers than pay off someone suing them for $10,000.  Sounds similar to the hedge fund guy you mentioned, but applied to state governments.

So since we're now way down the rabbit hole...

I think the issue with expats is some states say if you're a US citizen and your last state of residency was X, you're still a resident of X for tax purposes if you're still a citizen. I.e., some (and maybe all, I don't know) apply the same "rules" and "thinking" as applies to citizenship. Another maybe better way to say the same thing: If you're a US citizen, you must logically have a state of residency.

Also state bureaucracies can be real bullies. Especially to out of state low power taxpayers. In the case I'm thinking about, the state pointed to things like the individual in question had never officially surrendered her or his voter registration. They hadn't voted for years and years. But that part didn't matter. And the person had allowed an ailing, elderly parent to use an old car. Gosh, they made hay on that issue too.

Regarding the materiality thing, at a practical level that's true. I assume the reason people with small investments in multistate partnerships don't get snared by nexus all the time is, the state doesn't have the resources or financial incentives to care.

One final comment--and the state in question was not California but I think they'd behave this way too--but the professionals involved all thought the taxpayer was right and the state was wrong. I.e., the tax accountants including me and the tax attorneys all thought taxpayer could not still be a resident of state A when he'd spent a decade living, working, voting in state B. But after consulting in-state tax attorneys who'd be the ones to litigate the issue, the conclusion was going to court would cost $40K and that was about what the taxpayer owed in back taxes. And the optimal thing was to just pay the state A rather than pay the lawyers.

Professionally, I've seen a handful of really disgusting, disturbing actions on the part of federal and state agencies. Mostly state agencies if I'm fair. (The IRS btw is actually a very taxpayer-friendly organization compared to some state tax agencies and other federal agencies.) But the bullying a state agency did in the case I've vaguely described is high on the list.
Oh, that's right - voter registration was another item.  I renewed my voter registration with my foreign address, so no CA address there.  My CA driver's license expired years ago.  I've also renewed my U.S. passport while living abroad. Before leaving California, I sold / donated / threw away everything I didn't put in my luggage.  So there's no cars, houses, storage lockers, friends with my stuff, etc.

Especially after considering my hedge fund investments, I expect to have some amount of my NW that I will not spend in my lifetime.  Hypothetically, say California FTB claims I'm a resident owing back taxes.  My goal in this hypothetical would not be paying the smallest amount - it would be inflicting a precedent setting loss on them in Tax Court.

I think your hedge fund guy is a better example of how I'd react than the man who decided giving in was a better way to preserve his money.  But realistically for amounts under $100 I probably don't care either way.  In the past, I preferred to skip the foreign tax credit for my international mutual funds - the forms were not worth the money (the IRS eventually simplified the process to writing "RIC" next to a one line amount, if I recall correctly... RIC meaning Registereed Investment Company).  Maybe that will come up again when I have to deal with K-1 forms.

SeattleCPA

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Re: CPA time spent per hedge fund K-1
« Reply #10 on: March 11, 2023, 06:48:19 AM »
My goal in this hypothetical would not be paying the smallest amount - it would be inflicting a precedent setting loss on them in Tax Court.

Kind of off topic but...

CA FTB says if more than 25% of business's income comes from sales into CA, business and/or owner owes CA returns because taxpayer has nexus.

E.g., an Etsy business owner who makes three $1K quilts-so $3K of annual revenue--and who sells one to someone in CA per FTB owes CA income taxes, franchise tax potentially, and sales taxes. (This treatment applies their economic nexus concept.)

I would love to see someone litigate that. And I am confident FTB would lose eventually. But that's not the case FTB will even pursue.

MustacheAndaHalf

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Re: CPA time spent per hedge fund K-1
« Reply #11 on: March 11, 2023, 04:48:51 PM »
Kind of off topic but...

CA FTB says if more than 25% of business's income comes from sales into CA, business and/or owner owes CA returns because taxpayer has nexus.

E.g., an Etsy business owner who makes three $1K quilts-so $3K of annual revenue--and who sells one to someone in CA per FTB owes CA income taxes, franchise tax potentially, and sales taxes. (This treatment applies their economic nexus concept.)

I would love to see someone litigate that. And I am confident FTB would lose eventually. But that's not the case FTB will even pursue.
Some of my hedge fund investments will involve funding or buying companies.  If that happens to involve profits in CA, I see no problem paying tax on that.  But if CA claims I did not move permanently abroad, that I would challenge.

The year after I left CA I filed a CA tax return where I indicated I was a permanent non-resident, and owed $0.  I might have risked a trivial return fine over that, but I wanted to draw a line in the sand.  I wanted CA to challenge me then, or accept my return - and so, accept my status as a permanent non-resident.  (Not as some guarantee, but as possible evidence for my view of things)

Based on this thread, I've considered how I might setup payment of tax attorneys for a case like this.  I'd want a large amount contingent on winning in tax court, and payment of 0% of any settlement - both of which aligns their incentives with my goal.  Given it would involve the government on one side and billable hours on my side, I suspect it would drag out.  Not really a way around that.

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Re: CPA time spent per hedge fund K-1
« Reply #12 on: March 12, 2023, 08:18:36 AM »
Kind of off topic but...

CA FTB says if more than 25% of business's income comes from sales into CA, business and/or owner owes CA returns because taxpayer has nexus.

E.g., an Etsy business owner who makes three $1K quilts-so $3K of annual revenue--and who sells one to someone in CA per FTB owes CA income taxes, franchise tax potentially, and sales taxes. (This treatment applies their economic nexus concept.)

I would love to see someone litigate that. And I am confident FTB would lose eventually. But that's not the case FTB will even pursue.
Some of my hedge fund investments will involve funding or buying companies.  If that happens to involve profits in CA, I see no problem paying tax on that.  But if CA claims I did not move permanently abroad, that I would challenge.

The year after I left CA I filed a CA tax return where I indicated I was a permanent non-resident, and owed $0.  I might have risked a trivial return fine over that, but I wanted to draw a line in the sand.  I wanted CA to challenge me then, or accept my return - and so, accept my status as a permanent non-resident.  (Not as some guarantee, but as possible evidence for my view of things)

Based on this thread, I've considered how I might setup payment of tax attorneys for a case like this.  I'd want a large amount contingent on winning in tax court, and payment of 0% of any settlement - both of which aligns their incentives with my goal.  Given it would involve the government on one side and billable hours on my side, I suspect it would drag out.  Not really a way around that.

Here's a blog post that describes the issue I've been referencing: https://brighttax.com/blog/california-state-taxes-americans-living-abroad-guide/#:~:text=Known%20as%20the%20Safe%20Harbor%20Rule%2C%20expats%20who,there%20for%20more%20than%2045%20days%20per%20year%29.

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Re: CPA time spent per hedge fund K-1
« Reply #13 on: March 14, 2023, 08:27:26 AM »
Not a lawyer, so consider that in my theory:

A person living in CA pays taxes.  When they move to Nevada, they stop paying taxes to CA and start paying taxes in Nevada.  That's residence based taxation - it is based on where someone physically resides.  If CA claims to tax some people with residence taxation and others with citizenship based taxation, to me that is not equal treatment under the law.

At the Federal level, all U.S. citizens have citizenship based taxation.  Everyone is taxed in the same manner, which seems to me to be equal treatment under the law.

SeattleCPA

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Re: CPA time spent per hedge fund K-1
« Reply #14 on: March 15, 2023, 06:01:47 AM »
Not a lawyer, so consider that in my theory:

A person living in CA pays taxes.  When they move to Nevada, they stop paying taxes to CA and start paying taxes in Nevada.  That's residence based taxation - it is based on where someone physically resides.  If CA claims to tax some people with residence taxation and others with citizenship based taxation, to me that is not equal treatment under the law.

At the Federal level, all U.S. citizens have citizenship based taxation.  Everyone is taxed in the same manner, which seems to me to be equal treatment under the law.

That's the wrong way to think about this.

Here's the logic... you can't move out of the US and just via the move escape federal taxes. Similarly, you can't just move out of CA and escape state taxes.

It's really that simple. At least to the federal government and your state.

BTW you can escape US taxes by surrendering your permanent residency or renouncing your citizen. (US may make you pay the exit tax.) But that's more than just moving.

Similarly, you may be able to sever your residency connection with a state. The most common way would be to establish residency in another state--one that doesn't tax income--but again that's more than just moving.

BTW I don't know if every state works this way. But I know some do. Also it sounds like CA does.

The lesson in all this: Carefully research any big dollar tax planning gambits. The lawyers and accountants at the Treasury (and at big state revenue agencies like the FTB) are smart. They have a lot of experience in making sure government gets its share.

MustacheAndaHalf

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Re: CPA time spent per hedge fund K-1
« Reply #15 on: March 19, 2023, 05:51:15 AM »
The lesson in all this: Carefully research any big dollar tax planning gambits. The lawyers and accountants at the Treasury (and at big state revenue agencies like the FTB) are smart. They have a lot of experience in making sure government gets its share.
I agree research is better than being blindsided.  My internet search turned up a 2019 article from the "Journal of Multistate Taxation and Incentives" focused on CA residency for tax purposes.  That is where I came across "the Bragg factors", which are 19 objective criteria put forth by California's State Board of Equalization in a 2004 case.  Here are five of them:

Quote
5. The taxpayer's telephone records (i.e., the origination point of taxpayer's telephone calls);
6. The number of days the taxpayer spends in California versus the number of days the taxpayer spends in other states, and the general purpose of such days (i.e., vacation, business, etc.);
7. The location where the taxpayer files his tax returns, both federal and state, and the state of residence claimed by the taxpayer on such returns
...
14. The state wherein the taxpayer obtains professional services, such as doctors, dentists, accountants, and attorneys;
15. The state wherein the taxpayer is employed;
https://www.pillsburylaw.com/images/content/1/2/v2/121792/Revisiting-California-Tax-Residency-After-the-TCJA-JMT-Jan.-201.pdf

The Bragg factors are one approach, but another:

Quote
The second approach to residency is referred to as the "Identifiable Purpose" analysis.
...
"[W]here an individual expects to be out of California for an indefinite period which is expected to last more than two years, such individual will be considered to be out of the state for an indefinite period of substantial duration" and, therefore, is no longer considered a resident of California
https://www.pillsburylaw.com/images/content/1/2/v2/121792/Revisiting-California-Tax-Residency-After-the-TCJA-JMT-Jan.-201.pdf
« Last Edit: March 20, 2023, 05:59:36 AM by MustacheAndaHalf »