For a tiny Limited Partnership, trading futures only, how should the fund expenses be allocated to the partners? Example, Partnership made $40k in profit Incurred $5k in management fees paid to the general partner for managing the fund and turning a decent profit for the year Joe partner, who has put up 50% of the partnership capital (but does no trading, has his own full time non-trading job), gets a K-1 at then end of the year. Would he a) Pay 23% blended rate of tax on his share of profit ($20K profit), and take a writeoff on his share of expenses ($2.5k expenses), subject to 2% AGI limitation? OR b) The K-1 would report his profit as $20k - 2.5K = $17.5K and he would pay 23% on $17.5k? The general partner, of course is responsible for paying tax on his $5k fees (this would be his "earned income" in tax lingo). Any help/replies would be highly appreciated. Thanks & happy new year!
Any of the above COULD be your situation... or other more tax-favorable choices COULD be your situation. A Limited Partnership, by definition, has an offering memorandum which as the starting point states the potential tax ramifications of how the partnership is organized and how the GP is compensated. Once you have your tax pro read through that, then depending on the flexibility allowed in the language there may be choices to be made. For example: is the Partnership an investment vehicle or a qualifying active trader - might be a good question to learn the answer to. The LP is probably the most complex entity for this sort of thing, so reading the offering memorandum is most important at this stage.
traderstatus, thanks for your reply. However, unfortunately, it leaves me no wiser. I do understand it's a potentially complicated question. I also do understand it's best to go and ask a tax pro. However, consider the following facts: a) It's a LP between friends b) The capital involved is tiny c) What's the worst that can happen? The partners would never sue / argue with each other, not over this tiny puddle of money. IRS audit of the LP & the GP? Nothing to hide. They won't bother. At worst, they would disallow expense deduction etc, ask us to redo the returns, some interests etc. perhaps. I am in the business of managing risk. I accept this risk for the amount of $$ involved. When the money involved is much larger, we WILL have a tax pro helping us, as the risks would no longer be acceptable. Right now, it is. Now can someone give a straight answer? Assume we can rewrite (and re-re-re-write the partnership agreement as many times as we wish). Thanks
i'd advise you to spend $100 for 30 ninutes with robert green of green trader who's by far the father of trader taxes and the most knowlegable .learn what you need from him and have your local cpa do the work. don't be cheap when it comes to needing to know the right answers for your business
As long as you have all that flexibility with the agreement then the answer is "it depends on what you want it to be" Nothing is written in stone here. All the items you mentioned are certainly feasible depending on your circumstances and depending on what your goals are. The first question you probably want to ask yourselves, again, is is the Partnership an investment vehicle or a qualifying active trader. From there you go down the path of Investor decision making or Trader Status decision making. ...and those decisions are probably based on "what do you want the answer to be" for starters, and then you move in the direction of the final determination as to what your agreement/tax ramifications will be!
The partnership is a CPO. 100% futures. Nothing else. "Trader Status" etc. does not apply. The taxes on capital gain is always max 23% blended. Everyone, including the GP has a day job. NFA registration not required. Friends & family, way under $400k - pretty standard stuff, no? Seems not
Far from standard stuff Based on your question (which is not at all the tax efficient way to do things, but with the information given here is all we have to go with)... then: a) Pay 23% blended rate of tax on his share of profit ($20K profit), and take a writeoff on his share of expenses ($2.5k expenses), subject to 2% AGI limitation? OR b) The K-1 would report his profit as $20k - 2.5K = $17.5K and he would pay 23% on $17.5k? (a) is your answer because you have stated that you do not have trader status. (b) would require the partnership to qualify for trader status. The general partner, of course is responsible for paying tax on his $5k fees (this would be his "earned income" in tax lingo). Sure, if this is what you want for some reasons not stated herewith, go for it!