Hedge Fund Principal’s 2017 Year-End Tax Planning – IRC §457A and Donor-Advised Funds
In 2008, the IRS enacted Section 457A. In general Section 457A, states that any compensation that is deferred under a nonqualified deferred compensation plan of a nonqualified entity shall be includible in gross income when there is no substantial risk of forfeiture of the rights to such compensation. The enacted legislation addressed the treatment of nonqualified deferred compensation plans before and subsequent to the date of enactment. Section 457A effectively prohibits U.S. hedge fund principals/managers from deferring taxes on compensation paid by offshore funds located in tax haven.
In general, compensation attributable to services performed before January 1, 2009, to the extent such amount is not includible in gross income in taxable years beginning before 2018, such amounts shall be includible in gross income in the later of the last taxable year beginning before 2018, or the taxable year in which there is no substantial risk of forfeiture of the rights to such compensation. In short, compensation attributable to pre-enactment IRC § 457A needs to be included in gross income no later than December 31, 2017.
Tax planning options for IRC Section 457A Income
Consider using a donor-advised fund (“DAF”) to offset impact of IRC § 457A deferred compensation income. In general, a donor-advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) (non-profit) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account. In general, a contribution to a DAF allows the donor (hedge fund principal) to receive an immediate income tax charitable deduction that can used to offset the income attributable to 457A income.
Ask Our Experts
To further explore this and other tax planning options, please contact Robert Schachter at (212) 829 3243 or Edner Jocelyn, Jr. at (212) 829 3291 or fill in the form below.
