Hedge Funds and Deferred Management Fees: State Taxes
As is often the case in state tax practice, changes in federal law have had a major impact on tax planning and compliance. A few years ago, Congress eliminated a common mechanism used by hedge fund managers that enabled them to defer the receipt of incentive or management fees earned. Under IRC section 409A, which was effective for fees earned for services rendered on or after January 1, 2009, hedge fund managers would be limited in their ability to defer those fees.
The deferral mechanism created a potential for multiple state taxation, particularly in circumstances in which taxpayers are living or working in different states from the time of the deferral. This article will examine the state and local tax questions associated with those deferred fees.