Assume CTA earns his client .. $10,000 at the end of the year and CTA's fee is $20% or $2,000 which gets transferred from client's account to CTAs. Will customer's taxes show earned income of $10,000 or $8,000 since $2,000 went to the CTA? Or is it a manual process where Sched D will show $10,000 and then client has to deduct $2,000 for fees...hence bringing his taxable income to $8,000? Thanks.
I thought you were referring to a Chartered Tax Adviser but I'm guessing you were referring to a Commodity Trading Adviser. For your question, you cannot deduct this expense on Form 6781. (http://www.irs.gov/pub/irs-pdf/f6781.pdf) If you are eligible it would go on your schedule C for business expenses but you probably do not qualify. You probably fall under this: An asset management fee is a tax-deductible expense. List the fee on your Schedule A under the section called "Job Expenses and Certain Miscellaneous Deductions." You can clearly see where the IRS allows you to deduct investment expenses. However, your ability to enjoy tax savings via Schedule A depends on two factors. First, Schedule A provides tax savings only to the extent that your deductions exceed 2% of your Adjusted Gross Income. Furthermore, Miscellaneous Deductions are a "tax preference item" for purposes of calculating the Alternative Minimum Tax. If the AMT applies to you, some or all of these deductions could be disallowed. = Also Read: http://www.forbes.com/sites/davidmarotta/2012/06/25/are-investment-management-fees-tax-deductible/
Usually as a CTA/HF you expense monthly at the first day of the calendar month. This also keeps withdrawals/deposits in sync with end of month transfers in and out of the fund/account. You grab the monthly management fee immediately at start of the month or deposit as the clients money will remain locked for minimum of a full month period until the next deposit/withdrawal window opens. Client will only see $8000 in income ofcourse, and tax that.
Some good reads: http://www.cmegroup.com/education/files/CTA_guide_1-3-08.pdf http://www.cmegroup.com/education/files/HF-157_HandbookFinalUpdateDisclaimer_SR.pdf