Top tax and regulatory considerations for investment funds in 2021 and beyond

Stephen Ng

By Bao Nguyen, Nick Tootle and Stephen Ng (pictured) – With a new administration in office, an evolving regulatory landscape, and tax changes potentially on the way, investment funds should be proactive about watching for any shifts in tax policy or compliance requirements that might impact future planning.

Proposed tax changes

The following are a few of the most notable proposed tax changes under the current administration that could impact investment advisers and investors in the coming months and years:

• Increase in the top income tax rate to 39.6 per cent from 37 per cent.

• Increase in the long-term capital gains and qualified dividend tax rate to 39.6 per cent for taxpayers with income over USD1 million.

• Several changes to itemised deductions:

– Cap on itemised deductions for those with income over USD400,000.

– Reinstatement of the Pease Limitation and reduction of a taxpayer’s total allowable itemised deductions by 3 per cent for every dollar of AGI over a certain threshold.

• The 12.4 per cent Social Security tax, shared by employers and employees, would kick back in for wages over USD400,000 (it currently only applies to wages up to USD142,800).

• Estate and gift tax changes, including:

– Reduction of the exemption for estate and gift tax transfers from the current combined lifetime $11.7 million exemption to $3.5 million in estate inheritance and $1 million in lifetime gifts.

– Increase in the estate tax rate to a minimum of 45 per cent from 40 per cent.

Recent tax-related developments

The Treasury Department and the IRS recently issued final regulations for the treatment of carried interest. The final rules released January 7, 2021, clarify parts of 2017’s Tax Cuts and Jobs Act (TCJA) to provide additional insight and taxpayer guidance. The carried interest rules could continue to evolve, so this is an important area for investment advisers and investors to watch.

For the 2021 tax year, investment funds need to comply with a new reporting requirement. In addition to filing a Schedule K-1 for each investor, investment funds will now be required to file Schedules K-2 and K-3.

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State and local tax considerations

Florida’s lack of a state personal income tax continues to be one of the main draws for taxpayers who relocate to this state. However, many taxpayers are not fully aware of potential lingering tax ties they may still have to their former state. High-tax states like New York can be especially challenging to break ties with from a tax standpoint.

Anyone considering a personal or business move to Florida should consult with a tax professional who specialises in state and local tax to help them with planning for the tax implications of such a move and avoiding any unwanted surprises.

Regulatory considerations

The US Securities and Exchange Commission (SEC) is increasing focus on a few areas, including:

• Investment Adviser Marketing Rule – The SEC’s adoption of amendments to the long-standing advertising rule, Rule 206(4)-1, now applies to private pooled funds and makes it possible for funds to expand their marketing, advertising and communications efforts to attract more investors. However, there are strict compliance requirements that firms need to follow to stay in compliance while they make the most of this rule.

• Climate and ESG Task Force – The SEC’s Division of Enforcement recently announced a new task force that will focus on identifying misconduct related to environmental, social and governance strategies and products. The division’s 2021 examination priorities also included a focus on ESG strategies and products, an area that is seeing growing interest among investors.

• Information Security and Operational Resiliency – Also included in the SEC’s 2021 examination priorities is a focus on how firms are safeguarding customer data and managing operational risk related to employees working remotely and other pandemic-related changes.

Going forward

On the regulatory front, investment advisers should speak with a compliance adviser about how recent SEC announcements and rule changes may impact their business, and how they can come out ahead. Investment advisers have an extended compliance period to comply with the SEC’s new marketing rule – but that doesn’t mean they should wait. There are real business benefits to adopting the rule now, including gaining a competitive advantage.

On the tax front, there has been some talk in the media about whether any tax changes, including the proposed carried interest tax increase, could be enacted retroactively to January 1, 2021. While it thus far seems more likely that any proposed tax code changes would not go into effect until tax year 2022 (or beyond), it’s not too early for investment advisers to start speaking with a tax professional about how their investment fund may be affected in the future and what they can do to minimise tax liability. 


Bao Nguyen, CAMS,CFE,CRCP, Principal, Kaufman Rossin
Bao Nguyen is risk advisory services principal at Kaufman Rossin, one of the Top 100 US CPA and advisory firms. He specialises in recognising and assessing compliance risks for broker-dealers, investment advisers and private funds. He provides compliance solutions, like annual compliance programme reviews, anti-money laundering independent testing, supervisory control risk assessments, fraud investigations and customised compliance consultancy services. Before joining the firm, Bao was chief compliance officer for a broker-dealer, and a lead examiner with FINRA.

Nick P Tootle, CPA, Principal, Kaufman Rossin
Nick Tootle leads assurance and tax engagements, advising broker-dealers, investment advisers, hedge funds, private equity funds, and real estate funds. In the 2000s, Nick served as chief financial officer for a NASDAQ-listed global pharmaceutical development services company. Nick was elected to the global board of the Hedge Fund Association and also serves on the board of The Education Fund. He is a member of University of Miami’s Citizens Board, the Miami Finance Forum, and the Financial Markets Association.

Stephen Ng, CPA, Associate Principal, Kaufman Rossin
Stephen Ng specialises in the taxation of financial products and derivatives, as well as impacts on individual taxes. He guides clients through tax issues affecting hedge funds, private equity investments and funds of funds. Stephen conducts tax analyses of fund structuring, reviews private placement memorandums for tax compliance and tax minimisation, and prepares Schedule K-1 reporting for investors, among other services. Before joining Kaufman Rossin in 2012, Stephen was a senior tax manager in the financial services tax group of a regional accounting firm. He also worked several years at Ernst & Young, where he provided tax services to hedge fund clients with various trading strategies and financial products.