5 Important State Tax Considerations for Fund Managers

By Keiter CPAs

5 Important State Tax Considerations for Fund Managers

By Patrick Cureton, Tax Supervisor | Financial Services Industry Team

With the 2015 tax season well on its way, tax filings are top of mind for many fund managers.  In addition, to the complexities of federal taxes, the states also have complexities for investment funds and their managers.  As states become more aggressive in pursuing sources of revenues, they have started to push the boundaries of state tax law by creating more aggressive tax laws and by asserting their current tax regulations through audits and notices. We highlight five key state tax topics that fund managers should consider before filing 2015 tax returns.

1-Economic Nexus

Some states impose income tax on service based companies even if the company has no physical presence within the states. Instead, these states are looking at revenues sourced to the state to create an economic nexus and a filing requirement. For fund managers, as well as their investors, this may result in additional state tax filing requirements for states in which they have no actual physical presence.

2-Market Based Apportionment

Historically, states allowed service based companies to use the cost of performance method to apportion revenues to individual states. Under this method, revenues are sourced to the state where the work actually takes place. However, as our economy has become more service based, many states have changed to a market-based apportionment method. This means that instead of apportioning revenues based on where the work is performed, the revenues are now being sourced to the state in which the benefit is received. Considering the fact that many states are now using economic nexus to determine state filing requirements, it is more important to keep track of which states require market based apportionment and the location of where the benefits the company is providing are received.


For fund managers, one recent example of a state enforcing economic nexus and market-based apportionment is California. California is in the process of writing new regulations that would force fund management companies to look through their various investment funds and to the domiciles of the individual investors that benefit from their services to determine if it has a California filing requirement. A fund manager will now be considered doing business in California and have a filing requirement if the fees that are paid from the investors domiciled in California exceeds $529,562 or 25 percent of their total investment management fees.

3-Non-Resident State Withholding

As states create new methods to increase filing requirements, non-resident withholding is even more important for fund managers to address. For state withholding, knowing which level the tax is paid, which partners are required to pay, when they are required to pay, and which tax rate to apply is incredibly important. The majority of states require some form of non-resident state withholding and the chance that two states have the exact same laws in unlikely often creating an administrative burden on the fund manager.

4-Composite Filings

Fund managers should be aware of which states allow composite filings. Although composite filings can seem like a burden for the fund manager, the filings can relieve the issue of non-resident withholdings and will often relieve the individual from having an additional non-resident state tax filing. A fund manager should consider the following items before filing composite returns in all of its states:

  • Some investors may not qualify to file a composite return. Most states allow individual investors to file composite returns; however, there are often restrictions for entity investors.
  • If an investor has state income from another source, that investor may not be able to opt-into the composite filing.
  • Filing a composite return may subject the income to the highest taxable rate within that state.
  • Certain states have specific requirements that must be met before a composite return can be filed. For example, in Arizona, the entity must have a certain number of nonresident owners opt into filing the composite return.

5-Entity Level Fees

Many states now have an entity level tax or franchise tax for the privilege of doing business in the state. Complying with these taxes is often not as simple as paying a flat fee with your annual report. Several states apply an incremental fee to all partnerships or entities doing business within their state. For example, New York has the Partnership, Limited Liability Company and Limited Liability Partnership fee that is applied to most types of partnerships, including entities disregarded for federal income tax purposes. This fee is based on New York sourced revenues and can range from $25 to $4,500. The fee is due within 60 days of the tax year end and there is no extension. For fund managers, knowing where your funds are registered to do business or where they have business activities and investments is extremely important when it comes to complying with entity level taxes.

Questions on how these state tax laws may impact your investment funds? Contact your Keiter representative or email us.


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Keiter CPAs

Keiter CPAs

Keiter CPAs is a certified public accounting firm serving the audittax, accounting and consulting needs of businesses and their owners located in Richmond and across Virginia. We focus on serving emerging growth businesses and companies in the financial servicesconstructionreal estatemanufacturingretail & distribution industries and nonprofits. We also provide business valuations and forensic accounting servicesfamily office services, and inbound international services.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


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