Posted by James Augustine, CPA, MAFE
Regulated Investment Companies (RICs) regularly invest in entities classified as partnerships for U.S. tax purposes. It is important for RIC managers to understand the different types of partnership investments, most notably whether or not a publicly traded partnership (PTP) you may be investing in is treated as a qualified publicly traded partnership (QPTP). Knowing how to identify QPTPs is critical to ensuring your investment in one does not result in the loss of your RIC status.
Partnership investments are generally considered either private partnerships or PTPs for federal income tax purposes. A PTP must meet certain requirements:
A PTP that does not meet these requirements is considered a corporation for tax purposes.
Partnership investments affect a RIC’s compliance with Subchapter M in two main ways: the qualifying income test and the asset diversification test.
The qualifying income test requires at least 90% of a RIC’s gross income be derived from:
A PTP that does NOT meet the income requirements above qualifies as a QPTP for tax purposes; a PTP that meets the income requirements is simply considered a PTP.
For the qualifying income test, net income derived from an interest in a QPTP is considered qualifying income. However, for PTPs and private partnerships, a RIC must look through to the gross income of the underlying partnerships to determine how much of the partnership’s income is qualified. A RIC must include its pro rata share of the private partnership or PTP’s income as if the RIC received it directly. Since a nonqualifying PTP must meet the same gross income requirements as a RIC, as discussed above, at least 90% of its gross income should be qualifying for the RIC. Investments in private partnerships must be monitored closely, as they can expose a RIC to nonqualified income.
For the asset diversification tests, there are a few considerations:
When it comes down to it, a RIC has various options when gaining exposure to partnership investments but must ensure it continues to comply with Subchapter M at all times. Regularly analyze any partnership investments to ensure tax classifications are correct.
Contact James Augustine at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.
Receive insights from our specialists in a variety of areas and timely information on upcoming events directly to your inbox as they go live in our online Knowledge Center.