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Taxes on performance fee in POA account


Guest deepValue
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Guest deepValue

Say I were to charge a performance fee for managing a friend's account (I'd have power of attorney). My friend is not an accredited investor. I believe charging a performance fee is not technically allowed in this case, but if I were to charge one anyway, do you think the IRS would notice if my friend pays all of the tax -- including the tax due on my portion of the gains? Would I be in big trouble if I were to be audited? Is there a better way to do this?

 

Btw, we're both in the same income tax bracket.

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Say I were to charge a performance fee for managing a friend's account (I'd have power of attorney). My friend is not an accredited investor. I believe charging a performance fee is not technically allowed in this case, but if I were to charge one anyway, do you think the IRS would notice if my friend pays all of the tax -- including the tax due on my portion of the gains? Would I be in big trouble if I were to be audited? Is there a better way to do this?

 

Btw, we're both in the same income tax bracket.

 

Be aware of possible securities law violations.

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Guest deepValue

Can you manage his account free of charge and then have him "gift" you the money tax-free?

 

I'd be willing to do this even though it violates the spirit of the law, but unfortunately the "gift" will not be tax free; my friend will pay taxes on the capital gains and again on the gift (the fee will likely exceed the annual exclusion limit).

 

I might just try to find a way to technically manage money for her parents, who are accredited investors, while really managing her money.

 

EDIT: then again, I could just make her eat the tax. It's not that much by comparison.

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How about within a limited partnership? You're the general partner (not an investment advisor) and she's a limited partner. Any law against the partnership having a performance fee structure when it has non-accredited partners?

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Guest deepValue

How about within a limited partnership? You're the general partner (not an investment advisor) and she's a limited partner. Any law against the partnership having a performance fee structure when it has non-accredited partners?

 

That's an investment company, subject to the various Acts. There are lots of 'protections' put in place for non-accredited investors that make charging a performance fee impossible (as far as I know) unless you have accredited investors as well. Somehow those protections don't prevent the steady stream of American Greed episodes on CNBC.

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If working part time, consider forgoing carried interest - that's a high price to help run a friend's portfolio.

 

If working full time towards establishing a business, eat the cost to have a securities lawyer help in structuring a formal partnership - it's not only good for your investors but you as well. Handshake deals are nice, but when things get rough it's best to have a written understanding of your professional role and terms.

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