The Financial Bailout Plan enacted on October 3, limits the ability of a general partner and other service providers of an investment partnership with tax-exempt investors to defer the recognition of management and other fees.
If certain rules are followed, the tax law currently allows service providers to defer the receipt and taxation of compensatory fees. The new law takes away this ability if the compensation is payable by certain foreign corporations or by partnerships (which includes LLCs) that have tax-exempt or certain foreign entities as partners.
The new law, which applies to deferrals with respect to services performed after 2008, provides that compensatory fees are taxable when they vest, i.e., not subject to a substantial risk of forfeiture. However, if the amount of compensation cannot be determined when the right to compensation vests, taxation is delayed at the cost of an additional 20% tax on top of income taxes otherwise due.
The new law will not apply to short-term deferrals. In addition, the IRS is authorized to issue regulations excepting compensation tied solely to certain disposition gain.
There will be substantial uncertainty as to the exact parameters of the new law until guidance is issued by the IRS.
Please feel free to call Josh Wanderer (215 569 2198) or Larry Arem (215 569 4142) of the Klehr Harrison tax department if you would like to discuss the new law and its impact on you.
CIRCULAR 230 NOTICE. Any advice expressed above as to tax matters was neither written nor intended by the sender or Klehr, Harrison, Harvey, Branzburg & Ellers LLP to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. The recipient may not and should not rely upon any advice expressed above for any purpose and should seek advice based on the recipient’s particular circumstances from an independent tax advisor.