Taxation partner Brett Cotler was quoted in a Financial Planning article titled, “RIAs with private funds may need to pay self-employment taxes.”

“The Tax Court ruling last month in Denham Capital Management LP v. Commissioner will face a challenge in the Fifth Circuit Court of Appeals. In the meantime, the principals of RIAs or other advisory practices that also manage private funds should review the decision to see how it affects any possible taxes on their distribution of profits,” stated Cotler. “An exclusion had previously shielded limited partners from taxes on their distributed shares in the form of net earnings from self-employment.”

“The tax savings were definitely one reason why fund managers would structure their businesses — and wealth managers, too — as an LP structure,” Cotler said. “If it’s not the final nail in the coffin, we’re pretty close to it. … We’re thinking of a couple ideas that potentially would retain these tax savings for clients, but we’re still thinking through the pros and cons of those.”

“The exemption from self-employment taxes usually works out to savings of about 4% off the total hit — a number that sounds small but gets much bigger ‘when you multiply it out’ over millions of dollars in annual profit over several years,” Cotler noted. “RIA owners who manage private funds should speak to their certified public accountant or another tax professional to assess the potential impact of the ruling on their 2024 taxes and moving forward.”

“The tax effectively puts the owner in more or less the same position as the employee who’s subject to W-2 wage withholding,” Cotler said. “I do anticipate there will be some reactions within the industry in terms of ways to restructure.”

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Brett R. Cotler

(212) 574-1269
cotler@sewkis.com

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