Earlier this year, we introduced Day 1 Financials, a new initiative to help VCs publish their fund’s financial statements on the first day of every quarter.
Now, as part of Carta Fund Tax, we’re launching Day 1 K-1s. GPs subscribed to Carta Fund Tax will be able to share draft K-1s with their LPs shortly after the start of the year. This initial snapshot of the fund’s profit and loss statement will enable LPs to make proactive decisions about their tax strategies and get a head start on completing their returns.
Raising the bar
Schedule K-1 is an IRS form that the fund uses to report each partner’s share of annual profits and losses to the partner and to the IRS. LPs need to receive accurate, complete K-1s in time to file their tax returns. But most GPs struggle to deliver K-1s to LPs in time for a standard April 15 filing. When they do, they often need to make more adjustments later. This means that their LPs need to file for a tax extension or get hit with costly penalties for filing late.
Why do fund managers struggle to deliver on-time K-1s? The main reason is all the back-and-forth between the GP, their back office team, their tax provider, and their LPs.
If you’re a VC, it’s your responsibility to find a tax provider, connect them to your fund administration team, and collect tax information from your LPs. From there, your fund administration team needs to share your fund's financial activity with your tax provider. As tax deadlines draw near, your tax provider will prepare and file your fund’s Form 1065 tax return and any additional required state filings, as well as prepare your investors’ K-1s. Once your tax provider is finished, they send those K-1s back to your fund administrator, who distributes them to your LPs.
It’s way too many steps for completing a straightforward tax document. Communication delays add up, LPs get frustrated, and GPs ultimately take the blame.
It doesn’t have to be this way. By subscribing to Carta Fund Tax, you can consolidate your tax and fund administration providers, eliminating much of the relay that causes K-1 delays.
How Day 1 K-1s benefit GPs
Consolidating providers will simplify your tax season and help you impress your LPs. Here’s how:
A more efficient tax season: When you sign up for Carta Fund Tax, we collect required tax information for K-1s from your LPs several months before tax season, including the LP’s address, tax ID, and more. This will save you time and free you from personally reaching out to multiple LPs in your fund as deadlines approach.
Professionalized investor relations: By sending LPs draft K-1s months in advance of the deadline, you’ll impress your investors by showing them that you’re willing to take care of the little things that matter.
How Day 1 K-1s benefit LPs
Easier tax planning: Draft K-1s provide LPs with important tax information about their fund-related income or losses. LPs can then use this information to plan their overall tax strategies with their tax providers.
A recap of fund performance: Draft K-1s offer LPs a summary of a fund’s annual transactions and a general idea of the pace and scale of the fund’s returns thus far. LPs can use this information to make informed decisions about how they allocate capital moving forward.
Ready to raise the bar? Sign up for Carta Fund Tax today so you’ll be eligible to receive Day 1 K-1s early next year. Reach out to our team to learn more:
