A Tax Preparation Guide for Fund Managers

Navigating tax season is a necessary part of the job for a fund manager, and having a clear understanding of the preparation process and what is required will help ensure you know what to expect so there are no nasty surprises. This guide will give you a high-level overview of some of the steps needed, and how Verivest typically can help make the process as smooth and hands-off for you as possible.

Preparing for Tax Season BEFORE January

Verivest produces periodic financial statements for your entity, including a balance sheet, income statement, and general ledger, based on the supporting documentation you provide. Providing timely and accurate documentation is important to help avoid any delay in the preparation process for financials throughout the year, but also minimizes delays during the tax preparation process.

Best practice is to provide all documentation to your fund accounting team for all cash transactions in real-time, whether that’s making an investment, receiving investor funds, or paying an invoice to a vendor. Non-cash support is also needed, including all investments in the entity (such as investment statement of account), to ensure that investments are recorded accurately throughout the financial year.

In addition to entity financial statements, Verivest maintains your investor information, including demographics, capital account balances and activity throughout the year, including any contributions, redemptions, transfers, allocations and distributions. To avoid any issues, ensure your investors keep their information up to date in the investor portal throughout the year.

Your investor records, along with the financial statements, will be provided to the tax CPA after final approval from you has been received. Timely and clear communication are key here to avoid delays – we can’t move forward until we receive your approval!

First Tax Deadline: 1099s

The first deadline to be aware of during tax season is January 31st, when 1099-INTs and 1099-NECs are due. The form 1099-NEC is an IRS tax return document used to report miscellaneous payments made to non-employee individuals, such as independent contractors, during the calendar year. If you paid an invoice to a vendor in 2024 that was at least $600 in services, rents, prizes or other income, you will likely need to issue them a 1099-NEC.

The IRS requires most payments of interest income to be reported on tax form 1099-INT by the person or entity that makes the payments. A 1099-INT must be filed for each person/entity to whom interest payments over $10 were made in the calendar year. Generally, this includes any investor who held a note in the financial year, with the exception of IRA investors.

Verivest can help ensure your 1099s are filed on time with the IRS and distributed by the deadline to investors securely via the investor portal. To do so, we need all cash transaction documentation within the first five business days of the calendar year to ensure sufficient time to process the activity and to obtain any missing information that is needed to proceed. This is where preparation is key – if the information was provided in real-time throughout the year, your 1099-NECs and 1099-INTs aren’t likely to be a huge fire drill.

Distributing K-1s to Investors

Once your tax CPA has completed your return, K-1s are generated and can be uploaded for secure distribution to investors via the Verivest investor portal. It is important to note that K-1s may differ from the investor’s capital account balance due to differences in accounting methodology and allocation methodology. Keep this in mind as investors may have questions regarding the difference, depending on your unique situation.

Conclusion

Tax preparation is a crucial aspect of fund reporting. By following the steps outlined above, you are more likely to be well-prepared and avoid any delays in the process. Remember to keep accurate and timely documentation, communicate effectively with all parties involved, and stay up-to-date with the latest IRS regulations and requirements.

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This blog post is intended for informational purposes only and may not include all actions a fund manager needs to take in order to complete timely and accurate tax filings or other tax-related actions. Nothing in this blog is or should be construed as tax or legal advice. Consult with your tax and legal professionals to understand the tax, legal, and regulatory implications of managing real estate investments or investment vehicles.