Private Equity Tax Services by George Dimov CPA

Private equity accounting is complex and varies greatly with the individual characteristics of each fund. We provide the following services for our clients in all 50 U.S. States and Globally:

• Private equity administration & fund services 

• Bookkeeping/accounting, computation of distributions, etc.

• Annual tax filings

• Quarterly tax filings

• Franchise Tax

• State/Local Tax Compliance

• Audited/Reviewed Financial Statements

• Compilation of financial statements 

• Publication of Partners’ Capital Statements/Subsequent Closing, etc.

• Payroll support, issuance of 1099s, K-1s, etc. 

• Tax compliance consulting for tax matters related to individual partners of the fund

We have PE fund clients for administration, tax, and a variety of other tasks across a multitude of industries and project companies – from funds of funds to real estate to technology. 

Private equity funds are typically structured as partnerships, meaning they are not taxed at the entity level. Instead, income, gains, and losses pass through to the individual partners, who report them on their tax returns. The tax treatment depends on the type of income generated—long-term capital gains are taxed at preferential rates, while ordinary income is taxed at higher rates. Proper structuring and compliance ensure tax efficiency and minimize liabilities for both the fund and its investors.

Private equity funds are usually taxed as partnerships, meaning the fund itself does not pay corporate taxes. Instead, profits and losses pass through to investors based on their ownership percentage. Carried interest, the share of profits allocated to fund managers, is often taxed as a long-term capital gain if held for more than three years, benefiting from lower tax rates. Other income, such as management fees, is taxed as ordinary income at higher rates.

Equity in a private company is taxed depending on how and when it is realized. If an individual receives stock options or restricted stock, taxation may occur upon vesting or exercise. When selling private company equity, any gains are typically subject to capital gains tax, with long-term holdings (over a year) taxed at lower rates. Some stockholders may qualify for Section 1202 benefits, which can exclude a portion of capital gains from taxation on Qualified Small Business Stock (QSBS).

The taxes on equity depend on how it is acquired and sold. If received as compensation (such as stock options or RSUs), it is typically taxed as ordinary income at vesting or exercise. When selling equity, capital gains tax applies—short-term gains (held under a year) are taxed at ordinary income rates, while long-term gains benefit from lower capital gains tax rates. Additionally, self-employment or net investment income tax may apply in certain scenarios, impacting overall tax obligations.

Carried interest is the share of profits that fund managers receive as compensation, typically taxed as a long-term capital gain if held for more than three years. This tax treatment allows fund managers to pay lower tax rates compared to ordinary income. However, recent tax law changes and ongoing discussions could impact the taxation of carried interest in the future.

Management fees charged by private equity firms—typically around 2% of assets under management—are considered ordinary income and are taxed at standard income tax rates. These fees do not benefit from capital gains tax treatment and are subject to self-employment taxes for fund managers. Some firms explore fee waivers or deferrals to manage tax exposure, though these strategies must comply with IRS regulations.

A common tax-efficient structure for private equity funds is a limited partnership (LP) or limited liability company (LLC), which allows for pass-through taxation. This structure ensures that fund profits and losses flow directly to investors, avoiding corporate double taxation. Some funds also use offshore entities or blocker corporations to optimize tax efficiency for foreign or tax-exempt investors.

Private equity funds investing across borders must consider withholding taxes, transfer pricing rules, and treaty benefits to minimize tax liabilities. Foreign investors may face additional reporting requirements, and funds may need to structure investments through offshore entities to manage tax exposure. Compliance with FATCA and other global tax regulations is also critical to avoid penalties.

Private equity funds can deduct management fees, legal and advisory expenses, interest on fund leverage, and operational costs. However, certain fees may be subject to IRS scrutiny, particularly if they are structured as capital contributions instead of expenses. Tax-efficient fund structuring helps maximize deductible expenses.