Organizations in many industries—from real estate to business and professional services to asset management—look to partnerships to help streamline their operations, allocate their profits and offer flow-through tax treatment to their partners, among other benefits.

This is especially the case with various alternative investment funds such as private equity funds. As the industry has matured, private equity funds have used partnerships to help with a range of issues, including the location of investments—domestic or offshore—partner allocation models and partner preferences. To achieve this, private equity funds have added co-investment fund entities, blocker corporations and various other types of investment vehicle funds.

The result has been an increasingly complex business landscape that fund managers and chief financial officers have contended with as they attempt to attract and satisfy investors.

As the complexity has grown, so has the challenge of tax compliance. Innovation in tax preparation has struggled to keep pace with the sophisticated structure of investment funds, such as private equity and hedge funds.

Now, though, technology is catching up.

By automating data flows and tax allocations, these solutions address the compliance challenges that have intensified as partnership structures have become more complex.

Partnerships in their myriad forms offer flexibility to do special allocations, which at various times during the life of the fund can be complex. Partnerships offer asset management funds the needed flexibility for various partner allocations that are called for and required according to limited partnership agreements. These are commonly referenced as waterfall, carried interest and claw-back allocations. There are layering and aggregate methods used for partner allocations as well.

In one example, perhaps one private equity fund partnership sits on top of other fund partnerships, along with separate arms to each entity—creating what are commonly referred to as tiered structures. Attorneys, along with transaction advisory and tax professionals, have suggested tiered entity fund structures to solve common tax-sensitive partner concerns, such as offshore and tax-exempt investment tax issues. But the allocations for these structures can be complex. Without technology to support them, the manual processes required are laborious and susceptible to human error.

Then there is a firm’s need to manage the sheer volume of pass-through investments. After all, keeping track of the various investments or allowing fund partners to see the tax implications of those investments without support of partnership tax technology requires too many hours to produce real-time insights.

Looking to automation and data analytics

When it comes to tax compliance, the process has traditionally been labor-intensive and cumbersome. Many chief financial officers and general partners at funds longed for automation and data analytics for partnerships, and they have welcomed recent advances.

Partnership tax compliance technology has opened the door for much more data analysis. With automated data inflows and integrated data visualization capabilities, stakeholders can quickly see the tax implications of investment decisions. Automated tiering and allocation capabilities enable a tax function to address partners’ questions about their Schedules K-1 and K-3 and release them in a timelier fashion.

Partners in a fund structure who are invested across many private equity funds can now see and appreciate information much more efficiently with the ease of a digital platform.

The takeaway

For too long, the tax benefits of investment partnership structures came with increasingly complex and cumbersome compliance challenges. Fund CFOs’ demand for business insights, more timely tax reporting and better responsiveness to investors have facilitated the development of modern partnership tax technology solutions.

The automation of tax compliance processes offers advantages such as fund CFOs and GPs as transparency for investors, simplified calculation of complex allocations and a simplification to fund entity tiering.

In the end, it’s about meeting the expectations of the fund founders and their partner investors. In an increasingly digital world, in which everything from watching movies to buying pet food is on demand, they expect nothing less—so why not meet those expectations in tax reporting?