Accounting & Taxes

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Ask about fund accounting and tax issues, including filing dates, sending K1s, QSBS, and managing expenses. The knowledge base has questions answered by professionals in related fields, as well as expert guides.

1

How are Capital Calls for the GP’s Commit made on Decile Hub?

Obviously since the GP is making the Capital Call, it knows that he also needs to deposit his share of the funds, but I assume that that should be registered formally somewhere in the system and I couldn't find where. The GP does not appear in the Capital Commitment table when you use the option to make a capital call, so wondering if it gets roped in automatically.

Top answer:

Your Fund Admin will take care of this. Right now, the back-office function is for Decile Partners. On a high level, depending on the legal structure, the GP will have its own capital account in hub and the accounting team reflects this. 

 -  Mike Suprovici
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1

Does the “Proceeds from Sales of Investments” under “Cash Flows from Operating Activities” always represent proceeds from the sale of shares of portfolio companies?

I'm looking at an example were the “Proceeds from Sales of Investments” balance equals the “Cash and Cash Equivalents” balance, but these are supposed to be funds from a recent capital call that are temporarily in the fund's bank account as they are already committed to be transferred to portfolio companies to pay for new investments. I don't how is it possible that it got registered as “Proceeds from Sales of Investments”. Can this simply be a journal entry error?

Top answer:

If being considered "already committed to portfolio companies", this is probably what led to the error, so yes - this sounds like a journal entry error.

 -  Rob Del Prete
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1

In the Schedule of Investments, if a Portfolio Company entry shows a fund has made two investments in it but only one of them appears in the last line of that entry, does this mean that the fund is currently only holding one of the two investments?

I'm looking at an example where a fund has two investments of $25K in 5 companies (so total of $50K per company and total of $250K capital invested).  So the breakdown for each PortCo in the Schedule of Investments shows two investments of $25K in each case, with the first line of the entry showing a total of $50K and the last line only showing $25K for some reason. Can this mean that the fund is currently only holding one of the two investments and thus the last line in each PortCo entry is just showing the fund’s current balance? Here are some more details on the example I'm looking at: • Clicking on each Portfolio Company’s name, their respective “Founding Rounds” tabs seem to confirm that indeed the fund has made two $25K investments on each company. But the strange thing is that on the Schedule of Investments both investments appear with the same date (February 17, 2024) while on the “Founding Rounds” tabs they don’t (second investments are dated June 10 or June 17, 2024), which almost seems to be an error on the platform. • Since there are 5 companies in the portfolio, each with two $25K investments from the fund, that’s a total of $250K in invested capital (which is confirmed in the Fund Overview section, under “Now / Investable Capital / Invested”), but in the Balance Sheet though the “Cost of Investments” is -$125,000 ($25K times 5 investments registered at cost) which appear to indicate the fund is currently only holding one of the two investment it made on each company. • Balance Sheet also shows under “Cash and Cash Equivalents” a balance of +$115,000 (meaning $125,000 less $10,000 in Management Fees), which seems to indicate that the second $25K investment in each company hasn’t been made yet and the money is still the funds bank account. This will be unlikely if the investment dates on the Schedule of Investments were correct (February 17, 2024), but the fact that the dates on the second investments as per the “Founding Rounds” tabs is more recent (June 10 or June 17, 2024), it may be possible that the funds just haven’t been transferred to the portfolio companies yet and that’s why the last line on each portfolio company entry on the Schedule of Investments only shows one of the two investments.

Top answer:

The dataset is incorrect in the system leading to errors in how the SOI is being reflected.

 -  Rob Del Prete
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1

In the Balance Sheet (Assets section), why will the “Portfolio Investments, at Fair Market Value” show a negative balance if on the Schedule of Investments FAIR VALUE is higher than the COST?

I will assume that a negative balance in an assets account would only happen if the fair market value of the investment has gone to zero and thus the balance was zero less the cost of the investment. But in the example I'm looking at, in the Schedule of Investments it is clearly shown that FAIR VALUE is positive. Another option is that maybe those investments were made using SAFE notes and thus the investments are registered at cost instead of FMV because there hasn’t been a priced round on that company yet. But if that was the case, then the Cap Adjusted section should show a valuation projection using the cap defined in the SAFE notes as the valuation of the portfolio companies, and that's not the case in the example I'm looking at. The only additional option I can think of is that maybe the SAFE notes were issued without a valuation cap and thus rely on a discount to the next equity financing round, rather than a predefined cap. But in the example I'm looking at, by clicking on each Portfolio Company’s name, their respective “Founding Rounds” tabs seem to indicate that the fund holds Common Shares and not SAFE notes.

Top answer:

Without seeing the Balance Sheet, I would assume the journal entries are incorrectly booked in the system.

 -  Rob Del Prete
1
1

Are Capital Contributions from GPs always set by default as exempt from Management Fees in Decile Hub?

Can you select in Decile Hub whether the GP commits are to be included or not in Management Fee calculations?  I tried the following sections but couldn’t find an option to do so:  Back Office > Manage Capital Accounts > Type “GP” > Clicked on “Decile Admin” Back Office > Entity Management > Venture Institute Cohort 3 GP > Clicked “Edit” on both “General Partner” and “Fund”

Top answer:

Yes, you can enable the GP to pay management fees by going to Back Office > Entity Management > Fund "Edit" > Click "Enable GP management fees"

 -  Rob Del Prete
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1

What can be the different components of the Liability section in the balance sheet of a fund’s account?

Top answer:

The Liability section in the balance sheet of a fund’s account can include various components such as: - Management Fee Payable - Legal formation fees - State domicile filing fees - Blue Sky Fees - Form ADV Filing - Annual Tax Preparati...

 - 
Community Member
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1

Why is unrealized gain/loss in schedule of investments calculated by adding the cost and fair market value in the annual report?

The cost of investment is $25,000 and Fair Market Value is $100,000. But the unrealized gains in the report is $125,000, rather it should be $75,000.

Top answer:

It's calculated by taking the difference between the FMV and Cost of the investment.

 -  Rob Del Prete
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1

On a VC Fund's financial statements, where would the GP commit show up?

On the Statement of Assets on Decile Hub, under Investor's Capital, I see Capital Contributions - Limited Partners. Where would GP commit show up on the financials? Would it be under Assets but not under Investor's Capital? Is there a separate line item for GP commit?

Top answer:

There is a separate line item for the GP commit labelled Capital Contributions - General Partners.

 -  Rob Del Prete
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1

why the total cost, FMV and Unrealized Gain/Loss for each PortCo in Cohort 3 Investments do not add up?

why the total cost, FMV and Unrealized Gain/Loss for each PortCo in Cohort 3 Investments do not add up? 

Top answer:

The dataset in the system is incorrect, which is incorrectly reflecting investments and their values.

 -  Rob Del Prete
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1

How do I generate an annual report in Decile Hub?

The current answer includes a task from the Step 2 assignment of Sprint 8 for the Venture Institute program. I'm not sure if it is there due to an error, but it shouldn't be there.

Top answer:

Within the Fund Overview page, you can generate your annual report.

 -  Rob Del Prete
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1

Is interest earned from convertible note added to the cost base in the schedule of investments when the note converts to preferred?

Top answer:

Yes, the interest earned from a convertible note is typically added to the cost base in the schedule of investments when the note converts to preferred. The interest is usually converted into additional shares of preferred stock at the t...

1

Has anyone gone through the life cycle of a PFIC investment, from investment through to sale, with the reporting in between?

We are a VC fund considering making an investment in a PFIC and while I know there are reporting obligations during the investment period, what additional impacts are there from a tax standpoint around sale or divestment?  Should we expect to pay additional taxes? Would these be passed on to LP's or charged at the Fund level? What strategies can be taken to mitigate any impacts?

Top answer:

PFIC/CFC rules are complex and you may be required to distribute additional tax documentation to US investors, so you should reach out to your fund's tax provider to determine if your fund has any annual filing requirements. More info on...

1

Are the costs in the engagement letter absolutely final? (i.e. no added taxes, fees, transaction charges, fx conversions, etc.)

Top answer:

Yes! Only the fees outlined in the engagement letter will be charged by Decile Group. Other fund expenses, such as Delaware annual renewals, tax filings, Form ADV amendments, or registered agent fees are examples of additional costs to c...

1

Does Decile Group require automatic charges to our bank account, can I opt out and pay manually via wire?

Top answer:

Decile Group requires automatic debits for monthly or quarterly payments. If you are on an annual payment plan, you may elect to pay via a traditional invoice with a wire transfer.

 -  Nicholas Bird 0
2

Should I make an s-corp election for my management company LLC to save on taxes?

Does it makes sense to make the S-Corp election for the LLC so that you can take advantage of the Pass-Through Entity Tax election (so that you can deduct your CA taxes and escape the $10k SALT limit).

Top answer:

To make the PTET election an estimated payment must be made by June 15th of the tax year in question so if that was not done the first available option is for the 2024 tax year. Generally the PTET election is not recommended unless the t...

1

What are typical expenses (uses and amounts) for the first year of a new $5MM venture fund?

If the fund draws 3% management fees in the first year of a $5MM fund, the firm has $150k to spend on its functions and salary.  What are the business expenses and how much should we expect to pay for these?

Top answer:

Some business expenses that are typically paid from management fees include: Laptops & Equipment, Salaries, LP Events, Software, Due Diligence and Travel. Please review this article on fund expenses: https://govclab.com/2022/11/07/mana...

1

For a typical master-feeder structure in the BVI, the Master LP entity should have a US tax form W-8IMY correct?

Need either W-8BEN or W-8IMY to be on AngelList

Top answer:

It's really difficult to build an enduring VC firm on AngelList. Consider getting off AL. If you're going to setup a fund in BVI, all entities need to be in BVI. It's super expensive and inefficient for you to have entities in multiple d...

1

What's the difference between base and net management fees?

Question came to mind after reviewing the accounting section of Decile Hub

Top answer:

The difference would only come if there were offsetting fees that would reduce the base management fees. The base management fees would be calculated from what is stated within an LPA.

 -  Rob Del Prete
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1

How are capital calls treated for tax purpose?

Top answer:

Capital calls are not typically treated as taxable events. They represent the contribution of committed capital from limited partners (LPs) to the fund, which is then used for investments or to cover ongoing expenses. This is a transfer ...

1

When calling capital, does a VC state whether the called capital will go to investments or to management fees?

Question edited for clarity. 

Top answer:

Venture Capital funds typically do not specify whether a capital call is for investment or management fees when requesting funds from Limited Partners (LPs). The capital call is generally used to cover both investments and ongoing expens...

1

How will you markdown a struggling portfolio company that has not raised in 3 years?

Top answer:

Markdowns for a struggling portfolio company that hasn't raised funds in 3 years are determined by the valuation policy adopted by the fund. The valuation policy should provide guidelines on how to value such investments. This could invo...

2

Creating a capital call

Hey all,  How to create a capital call, when I do not see it in the top menu of the capital accounts? Thank you all!

Top answer:

The fund admin functionality which includes the capital call tool is currently only available for Decile Partners firms. 

 -  Mike Suprovici
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3

Clawbacks and Cornerstone LPA 2.0

With respect to a Cornerstone LPA 2.0 agreement; under what conditions would partners in a venture capital fund give back up to 20% of distributions to satisfy [fund] obligations?

Top answer:

Clawbacks would be very unusual - here are two examples of situations in which the Fund may need to claw back distributions to satisfy the Fund's obligations (but this is by no means all-inclusive): • If proceeds have been over-distribut...

1

Should I call more capital than I need?

Top answer:

No. Managers should only call the amount of capital that they need for current investments, fund expenses, and management fees. Excess capital sitting in a bank account without being deployed reduces the IRR of the fund. As a rule, manag...

1

Options and Taxable Events

Let's say you have a right to receive Pref Warrants from a Portfolio Company, but the company wants to change them to Common Warrants or Options that are a part of the stock option plan.  All things being equal (e.g. strike and number of options), pref warrants are more valuable than common warrants or options, so what is the best way to get dollar for dollar value and not have a taxable event?  Thank you.

Top answer:

As a VC, you should do your best to ensure that you get preferred equity. The reason that preferred is more valuable is because of special rights, that this class of stock receives and that's why it's more valuable. It's sub-optimal for ...

2

Is a DCF (Discounted Cash Flows) method generally being used to calculate a startup valuation?

Since DCF method uses historical data to predict future cash flows of the company, this usually does not fit a startup since we have very little to no data on the cashflows. It is better to look for some benchmarks to tell valuation of a startup since it shows how others priced the companies in a given market/ geography/ setup. 

Top answer:

Startup valuations are typically set by the market of investors. If there is a high investor demand, the valuation of the startup is typically higher. If there is low investor demand, the valuation of the startup is lower. If there is no...

1

Regarding fund domiciling in Delaware for non US residents, should we set up the management company in another country to avoid paying extra US taxes?

What is the usual tax rate in the USA for non-US residents but who have a management company paying them a salary in Delaware? 

Top answer:

Most VC firms set up the fund, the general partner and the management company in Delaware, including firms with foreign Managing Partners. This provides a clear structure with unified control and governance, and it helps to manage costs,...

3

Canadian Domicile in the US

One of my larger LPs can only invest in US entities, and my largest LP doesn't require but would prefer I domicile in Delaware. As a Canadian is that going to be an issue? Are there major tax issues I'll face? My wife is American, but not planned to be involved in the business (if that could help.)

Top answer:

Hi Scott, unfortunately it is not ideal for you as a Canadian to domicile your entities in the US. The reason being is that Canada does not recognize US LLC's as an entity type. You end up getting hit at a much higher tax rate on both yo...

0

Are LPA fund expenses annual or 1 time?

Are LPA fund expenses annual or 1 time?

Top answer:

Adeo: The Organizational Fees are for setup and have a cap, and there annual Fund Expenses that are not capped right now. I am speaking to the lawyers about a cap.

0

What do we need to put in LPA to help outside-US LPs don't trigger UBTI/UBI (paying US income tax)?

What do we need to put in LPA to help outside-US LPs don't trigger UBTI/UBI (paying US income tax)?

Top answer:

This is driven by investment decisions, not by contractual language. I would not recommend including this unless explicitly asked.

0

What is a Schedule K-1

What is a Schedule K-1

Top answer:

Part of 1065 filing. Partner specific form which details distributive share of all income and expense items incurred by the partnership.

0

What is Qualified Small Business Stock (QSBS) (Section 1202)

What is Qualified Small Business Stock (QSBS) (Section 1202)

Top answer:

A specific US federal tax exemption that allows investors in Qualified Small Business (defined as under $50M capitalization) for some capital gains tax exemption (up to 100%) based on how long the stock is held (minimum 5 years) up to $1...

0

What Are the Best Practices for Accounting Acquired Portfolio Companies via Share Swaps in Your Track Record?

What are the best practices to account for portfolio companies that are acquired through share swaps in your track record?

Top answer:

Compare the price per share between your purchase price and the current price when acquired, and then record this differential as a markup. This assumes that you will have the same number of shares. If the share counts differ, then just ...

 - 
Community Member
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0

What is the tax amount paid by a US LP in a Delaware fund after distribution of proceeds?

How much does a US LP (person) pay in taxes (in a Delaware fund) after proceeds are distributed at the end of a fund?

Top answer:

The long-term capital gains tax rate is 0%, 15% or 20% depending on your taxable income and filing status. Additionally investing in Section 1202 Qualified Small Business Stock could eliminate any tax burden for non-corporate LPs.

 -  Mike Suprovici
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0

Can I Count Industry Conference Content Creation Expenses as Marketing Costs for My Future Fund?

Hi everyone I have an opportunity to create content pieces (video and blog) via industry conference. This involves significant costs I have not registered my fund yet can I count these expenses as marketing cost later when I launch my fund ? Is there anything I need to do now that might help me account for this expenses later when I launch my fund.

Top answer:

As a general rule, the fund reimburses fund formation expenses, which tend to be legal expenses, and the fund does not reimburse other setup expenses, such as marketing. Pre-marketing is also highly regulated in most jurisdictions, so fu...

 - 
Community Member
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0

What are the US tax implications for a European LP investing in a Delaware LP or LLC?

One of my European LPs is asking about the US tax implications from becoming an LP in a Delaware LP or LLC. We have not yet engaged lawyers and tax advisors for fund formation so hoping that someone can share links. I am seeing conflicting reports. According to KPMG 2015 () page 25-26 see section 'Sale or Exchange of Capital Assets' gain on the sale of investments is not taxed in United States if you are nonresident alien but then according to  if the Delaware LP entity (the fund) 'is engaged in U.S. trade or business and has effectively connected income' my Limited Partner will have to pay withholding taxes. Any advise?

Top answer:

The KPMG article is correct, capital gains are not sourced to the US and therefore will not be taxed in the US for your foreign LPs. To address your point about engaging in US trade or business, investment entities are not considered to ...

0

Are the audit and tax fees reasonable for a first-time $10M fund?

Are the audit and tax fees reasonable for a first-time $10M fund?

Top answer:

Yeah, that’s market. However, our partner Spicer Jeffries will do much better. If you want an intro, ask Long That being said, you should avoid doing audit in Fund 1 It’s a small fund and it’s not justified.

 -  Mike Suprovici
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0

Where Can I Find a Matrix Listing Expenses for Fund Manager Fund and ManCo?

I thought I saw a matrix showing a list of expenses and whether the Fund Manager Fund or ManCo can expense it... Anyone know where I can find that?

Top answer:

You can learn about fund expenses here: https://govclab.com/2022/11/07/managing-fund-expenses-for-venture-capitalists/

 -  Mike Suprovici
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0

What is the best approach to valuing and warehousing a $500K micro-services investment for a venture fund's portfolio companies?

I would appreciate some guidance on warehousing from you guys: I invested $500K over two years in a collection of micro-services designed to be a foundational shared resource for my portfolio companies. This is one crucial vertical in my strategy for differentiating the value proposition of my venture fund. I am contemplating two options: (1) treat them as assets contributed at cost based on invoices from developers or (2) warehouse the entire company that paid to create them which I own raising the question of how to value it as it was only ever used as a legal vehicle to create these assets and has no revenues.

Top answer:

You will not be able to warehouse the assets. If you’re going to warehouse, the assets must be startup equity.

 -  Mike Suprovici
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1

Where to Allocate Expenses for Attending Port Co Board Meetings: Management or Fund Expenses?

Where should we bucket expenses (travel+frugal entertainment) associated with attending port co board meetings? Management Co Expenses or can that be pushed to Fund Expenses?

Top answer:

You can _technically_ charge stuff like this as a fund expense, but some/most LPs would have a problem with that because that’s part of your job and they are commonly paid from management fees. So, typically those are done at the ManCo l...