Complex Waterfall Structures: Identifying, Allocating, and Reporting Preferred Returns, Clawbacks, Taxable and Nontaxable Capital Shifts

Waterfall provisions ensure investors recoup their investment along with a specified rate of return referred to as a hurdle rate. Once the return of capital is recovered, profits are allocated as stipulated in the operating agreement. Almost always, there are preferred returns that guarantee the limited partners' specific returns and motivate the general partner to maximize profits on the investment. These distribution tiers are known as waterfalls, and computing and reporting these distributions is complicated.

Private equity investments usually consist of multiple deals. A general partner's share of profits from an investment is referred to as the fund manager's carried interest or carry. A volatile market, for example, could produce early gains followed by subsequent losses. A clawback provision requires the general partner repay the prior excess distributions. These repayments are generally repaid net of the tax paid on the prior profit distribution.

Listen as our panel of experts guides you through challenging waterfall scenarios utilizing illustrative examples of these arduous calculations. Tax practitioners working with private equity partnerships need to understand how to calculate, allocate, and report complex waterfall structures.

• Target capital account basics
• Components of complex waterfalls
  • Preferred returns
  • Operating distributions
  • Tax distributions
  • Performance driven metrics
  • Clawback provisions
• Advanced target issues
  • PIP (partners' interests in the partnership) allocations
  • Guaranteed payments
  • IRC Section 704(c)
  • Nontaxable capital shifts
  • Taxable capital shifts
• Boilerplate language
  • Gross vs. net P&L provisions
  • Provisions apportioning the general partner's proceeds
  • Liquidating provisions

The panel will cover these and other critical issues:

• Targeted returns using guaranteed payments
• Calculating preferred returns
• Identifying boilerplate language in operating agreements for waterfall structures
• Impact of clawback provisions on general and limited partners

After completing this course you will be able to:

• Identify common boilerplate language in operating agreements for waterfall structures
• Determine how to allocate preferred returns to private equity partners
• Ascertain the impact of clawback provisions on limited and general partners
• Decide how IRC Section 704(c) affects waterfall allocations

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).