Fund tax returns - process and timing.
One of the common questions we get from sponsors is how do taxes get done for a customizable fund. Let us walk through the basic steps.
- December - verify investor information. At the end of the tax year, you will need to verify that all investor information is still accurate on the portal. Sometimes investors move so they may have forgotten to update their address. We recommend sending out an email in December of each year to your investors asking them to log into their investor accounts and verify that the information in their user profiles is still correct.
- January - timing of K1s email to investors. We recommend that you send out an email to your investors informing them an approximate timing on the K1s. With funds, the earliest they will likely see their K1s will be end of March. In cases where your fund is waiting on K1s from other investments, it is likely that investors will need to file extensions. It is best to inform investors early to avoid frustration.
- February - file extensions for both the fund entity and manager entity. Its always best to file extensions even if you don't need them. We recommend you reach out to your tax preparation firm and request they file extensions for your entities. This is critical since IRS penalties are very substantial if you miss their filing deadlines and have not requested an extension. Tax firms are busy so get confirmation from your tax firm that they actually filed the extensions.
- February/March - collect K1s and 1099s. It is important to be very organized during the tax season. Create a list of all K1s and1 1099s that the fund expects to receive and start tracking when they are coming in. If your fund is investing in passive deals and you have not received a notification from deal sponsors on the timing of their K1s, reach out to them immediately. Start collecting all tax documents.
- March - submit K1s 1099s to Avestor. In order to calculate investor level K1s, Avestor will need to upload all K1 and 1099 data into our systems. It is critical that you provide Avestor the K1s as soon as they come in so we can get the information loaded into our systems.
- April onwards. Avestor process. In order to complete your fund tax returns and investor K1s, all underlying tax data must be available. The following process is how we generate fund level returns.
- Avestor uploads all the K1s and 1099s for your fund into our backend systems.
- For your fund, Avestor calculates each investor's pro-rata share of real estate income/losses, interest income, business income/losses for the investments that investors are allocated into. Avestor also calculates their capital accounts information.
- Fund managers will review all tax calculations on Avestor's portal. Avestor will also provide fund managers with a detailed spreadsheet that shows each investors preliminary tax information. If any issues, Avestor will work with the fund manager to correct the information.
- Fund managers will then submit the final spreadsheet and all K1s and 1099s from underlying investments to their tax firm.
- Avestor will work with the tax firm to ensure they understand how customizable funds work and to pull together the tax return.
- Your tax firm generates a 1065 and investor K1s for review. Once you approve, they will file the tax return and issue the investor K1s to the fund manager.
- If your tax firm gave you a consolidated tax document, you will need to split out the investor K1s into individual pdf files. This can be done by opening up the file, select print selected pages, and then printing to PDF each investors K1 return as a separate file.
- Fund managers can then upload the K1s to investor accounts.
- Fund managers will notify the investors that their final K1s are available for download from the investor portal.