Accavallo & Company, LLC

Navigating Alternative Investments: A Tax-Savvy Approach for Nonprofits

Considering alternative investments for your not-for-profit entails a thorough evaluation of potential risks and rewards, especially in light of their distinct tax implications. While these investments often boast higher long-term performance compared to traditional securities, they present nuanced considerations that demand careful attention. Here’s a comprehensive overview to guide your decision-making process.

Complex Valuation Dynamics

Diverging from conventional securities like stocks and bonds, alternative investments, encompassing hedge funds, private equity, real estate, venture capital, and cryptocurrency, lack easily ascertainable fair market values. While they offer exposure to high-growth ventures in pioneering industries, their illiquid nature restricts the ease of reallocating assets, posing significant challenges for nonprofits reliant on accessible operating capital. Nonetheless, the inherent complexity of these assets often correlates with heightened returns, albeit at augmented risk levels.

Fee Structures and Manager Selection

Alternative investment vehicles typically operate as partnerships or limited liability companies (LLCs), functioning as pass-through entities where income and tax obligations flow directly to investors. Crucially, selecting an adept manager with a proven track record and access to superior investments is paramount. It’s imperative to scrutinize fee structures, encompassing base management fees, typically ranging from 1.5% to 2% of the fund’s capital, alongside performance-based fees, such as carried interest, which can soar up to 20% or more of profits.

Tax Implications: Unraveling Unrelated Business Income (UBI)

Navigating the tax landscape of alternative investments necessitates a nuanced understanding of unrelated business income (UBI). While investment income like dividends and gains typically elude UBI taxation, investors in pass-through entities assume a business-like role, subjecting distributions to potential UBI taxation. Moreover, UBI encompasses income derived from debt-financed property, with the associated tax liability contingent on the extent of financing utilized for investments.

Strategic Tax Planning and Compliance

Given the intricacies of tax regulations surrounding alternative investments, meticulous tax planning and compliance measures are indispensable. Pass-through entities furnish partners or members with IRS Schedule K-1, delineating individual shares of income, dividends, losses, and deductions, facilitating UBI identification and reporting. Collaborating with a seasoned tax firm ensures informed decision-making aligned with your organization’s fiscal objectives, enabling proactive management of tax liabilities and regulatory compliance across federal and state jurisdictions.

Determining Suitability for Your Organization

Evaluating the suitability of alternative investments necessitates a holistic appraisal of your organization’s financial objectives, risk tolerance, and liquidity needs. Our team of experts specializes in guiding nonprofits through this intricate decision-making process, offering tailored insights to ascertain alignment with your strategic goals. Should you opt to integrate alternative investments into your portfolio, our comprehensive tax advisory services ensure meticulous tax planning and compliance, safeguarding your organization’s financial well-being.

Consult with your tax professional at Accavallo & Company, LLC to help navigate the complexities of alternative investments and tax implications, empowering your not-for-profit to make informed decisions and optimize financial outcomes.

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Sherri Fisher is a Tax Manager at Accavallo & Company, LLC.  Sherri has longstanding expertise in Trust and Estate Taxation, Eldercare, and Estate planning. Sherri appreciates the relationships she has built with estate planning attorneys and advisors, to provide a team approach to assisting her clients. Sherri also has seasoned experience in business and individual taxation and is partial to assisting start-ups in developing overall accounting and operating plans.

Prior to joining Accavallo & Company, LLC, Sherri was a manager in a large firm, servicing high net worth trust clients, business, and personal clients. She was also a Partner in a large bookkeeping firm, which specialized in cloud accounting systems for regional and national companies. Sherri led a team in assisting clients to organize their accounting systems.  She is a graduate of Florida Atlantic University with a B.S. degree in Accounting.    

Sherri’s experience includes working with companies and organizations in a variety of industries including:

  • Investment Trusts

  • DAPT and Family Investment Partnerships

  • Estate and Probate Administration

  • E-Commerce

  • Manufacturing

  • Construction

  • Real Estate Investment

  • Marketing and Service-based industries

In addition to her professional accomplishments, Sherri is an Intuit Advanced Pro Advisor, Intuit Future Firm Advisory Board member, member of the Valley WIN Network, and proudly served as past Connecticut Public School liaison for the Yale Tommy Fund for Childhood Cancer. Sherri enjoys time with her family, Cleveland sports, thrifting and gardening.