The introduction of the Tax Cuts and Jobs Act (TCJA) in the United States last December has been keeping tax specialists and accountants particularly busy, as hedge fund managers and family offices seek to best position themselves under this new tax regime.
The introduction of the Tax Cuts and Jobs Act (TCJA) in the United States last December has been keeping tax specialists and accountants particularly busy, as hedge fund managers and family offices seek to best position themselves under this new tax regime.
One boutique firm that has directly benefited from this major tax overhaul is Akram & Associates. Based in North Carolina and New York, the firm, founded by Muhammad Akram six years ago, has taken a proactive approach to ensure that all of its clients have been kept abreast of TCJA developments, providing more of a white glove than a cookie-cutter approach when it comes to audit, tax and consulting services.
“We’ve grown over 100 per cent this year, which is very encouraging,” comments Akram, adding that the eight-strong team has helped a lot of clients over the last nine months in response to the TCJA, “in particular family offices, making sure they are in the tax efficient structure to take advantages of the TCJA tax saving opportunities.”
C Corp are now more competitive under the TCJA in terms of the tax rate. As Akram explains, C Corps now pay at the revised 21 per cent tax rate, but can pay up to 39.8 per cent effective rate when distributing all earnings. A C Corp that distributes half of its retained earnings will pay at 30.4 per cent rate. A C Corp that retains all of its earnings will pay at the 21 per cent rate, but will at some point need to pay out dividends. As such, shareholders do not escape the tax entirely but rather defer to a later point in time.
Pass-through entity owners can pay up to an effective tax rate up to 37 per cent on income. However, if they qualify for the new 20 per cent pass-through deduction (Qualified Business Income Sec. 199 A), their highest effective rate can be reduced to as low as 29.6 per cent. One key benefit of pass-through entities over C Corps is that they do not pay tax on distributions to their owners.
Other areas that Akram & Associates has been addressing this year extend to net operating loss (NOL) carryback for securities traders and excess business loss limitation under the TCJA, in addition to SEC & IRS guidance on cryptocurrencies.
“For each client, making sure they are getting the right level of deductions under the TCJA has been a big focus for us in 2018. Those operating pass-through entities need to reevaluate their tax strategy and work with their tax consultants to determine how they can change things internally to get deductions under the TCJA.
“Every client is unique in this sense and it has provided a lot of opportunities for accountants and tax specialists since the TCJA was introduced, with respect to restructuring,” comments Akram.
On the restructuring issue, whether a family office ought to convert from a pass-through entity to a C Corp largely depends on the way it operates. A family office that manages its own money in-house, paying expenses and so on, can better control those expenses as compared to family offices who manage their substantial wealth using third party investment managers.
“Therefore, restructuring as a C Corp applies more to family offices who are operating in-house and want to make sure all the expenses they are incurring can be taken as a deduction. By doing this they also qualify for the lower income tax rate,” adds Akram.
Most of Akram & Associates’ family office and alternative investment fund clients are located in the US, in addition to other clients located in Japan, Hong Kong and Canada.
Akram believes one of the advantages for family offices to work with a boutique service provider is the speed of delivery and attention to detail; something that is not always a given when working with global service providers. He references one family office who should have commenced restructuring on January 1st of 2018. However, their incumbent tax advisor was late getting everything completed, meaning they missed a lot of tax deductions.
“We are more proactive; we offer clients the right help at the right time,” says Akram. “We recently assisted a client who, in their existing format, would have missed the opportunity to be able to take new deductions now available under the TCJA. We restructured them from a pass-through entity to a C Corp.”
Another area that the firm has been busy helping its family offices with is monthly reporting for the management and internal auditing to detect, deter and prevent fraud
“The aim is to enable our clients to better understand how the fund managers they invest with are generating alpha given the higher volatility we’ve seen in the market. By helping with the monthly reporting, our clients can see how they should rebalance their portfolios and diversify their risks.
“In the family office business, privacy is key. They don’t want information being shared with anyone else. They have a lot of external parties they have to deal with so what we’ve done is consolidate data from those different sources. We then aggregate it and deliver it to them in a summary format. They can see their investment allocations each month in a more refined form and make better decisions on which funds are performing well or not,” outlines Akram.
Another area of importance for Akram & Associates, like many other service providers, is to get up to speed with the fast evolving world of cryptocurrencies in recent times.
A number of online trading platforms have emerged for people to trade digital assets. The SEC has written, If a platform offers trading of digital assets that are securities and operates as an “exchange,” as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration, but the SEC adds that it has concerns that many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not.
The SEC does not consider Bitcoin or Ethereum to be securities, although many, but not all Initial Coin Offerings are securities and will come under the regulatory control of the SEC and relevant securities laws.
“People were deferring capital gains because they were swapping Bitcoin for Ethereum or other Altcoins, for example, and saying it was not a taxable event under a like-kind exchange. That’s the wrong approach. As soon as you exchange coins from one to another you are incurring a capital gain or loss and this is a taxable event”.
“That being said, we are seeing more clients where their main focus is on cryptocurrencies, setting up dedicated strategies. Some hedge fund managers are trading cryptocurrencies, some are taking more of a long-term buy-and-hold approach,” confirms Akram.
Looking ahead to 2019, Akram is upbeat, citing the fact that hedge fund managers are looking for firms specialised in the alternative investment industry providing personalised services at competitive rates.
“This is benefiting a boutique accounting firm like ours and we will continue to build out our hedge, private and venture capital fund client book. We will also continue to focus on family offices in the New Year. I feel it is a space where they have not been getting the best service which is something we can provide to them,” concludes Akram.
