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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11361
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I paid a large placement fee to a broker a LP in a private

Customer Question

I paid a large placement fee to a broker for becoming a LP in a private equity fund that runs 10 yrs. how do I report this placement fee to the IRS? which field in which IRS forms? I need precise details. in what year of the fund's life do I account for the placement fee? the fee clearly reduces my gains, but the question is how to account for it: is it a deductible expense, capitalized expense or what?
Submitted: 10 months ago.
Category: Tax
Customer: replied 10 months ago.
the private equity fund sends me annual k1, however that form does not capture the placement fee anywhere. the placement fee is only mentioned in a foot note.
Expert:  Lane replied 10 months ago.

A placement fee is capitalized, and, added to the value of the investment. So, is handled when the underlying investment is sold

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This adds to your basis, which will lower your capital gain upon sale.

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Your broker can verify this.

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Please let me know if you have any questions at all.

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If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the faces or stars on your screen, and then clicking “submit")

JustAnswer will not credit me for the work unless you do.

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Thank you!

Lane

I have a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986

Customer: replied 10 months ago.
I asked for precise instructions of how to report the placement fee to the IRS, and in what year of the fund's 10 yr life time. I need precise IRS document numbers and field numbers. in that sense, you have not answered my question and I can't give you credit.
Expert:  Lane replied 10 months ago.

FYI - I checked my files (thought I remembered something about placement fees) and I have one client that has seen this before.

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He received a cover letter with his first K-1 with the following statement:

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"Your share of placement fee paid to JPM Securities for this investment during 2014 is: $20,000

It is not reflected on your K-1 and will not be in the future. Please consult your tax advisor... and save a copy for future years."

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Did the research at the time, and this falls under § 709

The "future years" refers to the fact that under

Expert:  Lane replied 10 months ago.

As I said earlier, you don't repoirt it at all until you sell ... THIS IS NOT A CURRENTLY DEDUCTIBLE ITEM.

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Once you DO sell you'll unclude this as part of your basis on form 8948, which will flow to your schedule D, which will flow to the front page f the 1040

Expert:  Lane replied 10 months ago.

I hope you’ll rate me (using those stars, or faces on your screen, by clicking submit) based on thoroughness and accuracy, rather than any good news / bad news content. Otherwise I’m working for no crediting at all here.

Thank you!

Lane

I hold a law degree (JD, Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP® and CRPS designations. - I’ve been providing financial, Social Security/Medicare, estate, corporate, both for-profit and non-profit, and tax advice, since 1986.

Expert:  Lane replied 10 months ago.

What else can I possibly tell you? In your originla question, you said "the fee clearly reduces my gains," but then asked how to account for it ... the taxable event for realizing that gain is upon YOUR liquidation of YOUR position in this fund (as with any capital gain on any asset)

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The phrase deductible and capitalized are mutually exclusive, unless you're asking if you get to amortize this going forward, and that's not the case. This is not an organizational fee to you as you are a LIMITED partner. It's simply a part of your investment.

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This, as any other capitalized item, adds to your basis (is a part of your basis), and, until you liquidate (whether you wait 10 years or not - that may or may not be allowable, based on the terms of this particular contract) is simply a number that you will retain for your records.

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When you DO liquidate, either voluntarily or as per your investment agreement in 10 years, you will use this number in reporting your basis.

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(fomr 8949, to schedule D, to line 13 of your 1040)

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If you'd like some third party verification, see this: https://ttlc.intuit.com/questions/2795195-i-paid-a-placement-fee-for-a-investment-is-this-fee-a-deductible-expense

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Becasue placement fees are not tax deductible by a fund's manager, making the manager reluctant to bear such fees directly, the typical solution is for the fund to bear the placement fee, but require an offset against management fees of 100% of any placement agent fees paid by such fund.

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This is the rationale for the discolsure to you.

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There's just no other way to say this.

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Lane

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