Audit and Tax Implications for Hedge Funds Based on New SEC Rules for Smaller Companies
May 7, 2015 - By: SC&H Group
SC&H Group’s Audit and Tax Services teams offer the following insights into how hedge funds can best manage tax and audit implications associated with the new SEC rules that expand access to capital for smaller companies.
The Securities and Exchange Commission (SEC) recently adopted final rules to facilitate smaller companies’ access to capital and provide investors with more investment choices.
Mandated by Title IV of the Jumpstart Our Business Startups Act (JOBS Act), the new rules update and expand an existing exemption that will enable smaller companies to offer and sell up to $50 million of securities in a 12-month period.
Many experts believe that the new regulations will stimulate middle-market and small-business investment activity. However, these new opportunities come with tax and audit implications.
“The rule changes may lead to more opportunities for hedge funds to invest in these smaller companies,” said Paul Shifrin, a Director with SC&H Group. “Managers of these hedge funds should be aware that, from an audit perspective, this could increase the challenge of presenting the financial statements on the fair value basis, as these small companies can be difficult to value.”
It is important to note that hedge funds operate much differently than traditional brick-and-mortar and service companies – and face a unique set of challenges when it comes to audit and tax requirements.
From an audit requirement perspective, there are a number of criteria that need to be taken into account, which include:
- Annual SEC audit requirements
- Annual audits by third-parties to ensure that the returns on the funds and financial statements are accurate
- An enhanced need to minimize the chances for fraud
Common tax challenges and complexities for hedge funds often include:
- Issues related to mark to market (MTM) , 988(a)(1)(B) , QEF, and PFIC elections
- Foreign account reporting
- Foreign partner reporting/withholding
- Reporting capital gains versus ordinary income
- The timing and character of reporting gains, losses, various items of income and deduction
In addition, SC&H Group has developed a white paper outlining key tips, specifically to help hedge funds choose the best auditor and tax preparer.
If you have any questions, or would like to discuss the tax and audit challenges facing your hedge fund, please contact SC&H Group here.