With tax season fast approaching, we wanted to spotlight a lesser-known benefit of NES Financial’s Fund Administration Solutions: simplified distribution of K-1 forms to EB-5 investors. This week, we sat down with Stephen McClain, NES Financial’s Director of Product Management, to talk about the pain points issuers have in dealing with the required tax form — and how our Investor Portal turns a common operational annoyance into a non-issue.
Q: Thanks for speaking with us, Stephen. First, could you give us a quick overview of what the Schedule K-1 is, and why it’s required for EB-5 investors?
A: The Schedule K-1 is a form the IRS requires to document so-called “pass-through” taxation, which effectively shifts the income tax liability from the entity earning the income to those who have a beneficial interest in it —for example, from a business to its partners. Its purpose is to report the amounts passed through to each party, to ensure that taxes are accurately assessed for all involved.
Because the majority of EB-5 projects are structured as limited partnerships, K-1s are required of immigrant investors in most cases; however, due to the particularities of the EB-5 arrangement, distribution of K-1s is often far from straightforward.
Q: What problems do issuers run into when dealing with K-1s?
A: A single EB-5 project is often funded by investors from all over the globe — whose addresses on file may or may not be up to date, or easily delivered to. As a result, distributing physical K-1s through the mail (and then confirming receipt) can be a real headache.
Q: What does NES Financial do to help?
A: Well, after listening to our clients’ complaints about their difficulties dealing with K-1s, we saw an opportunity to build a streamlined K-1 distribution process into our investor-facing EB-5 Portal, and we now offer this K-1 Distribution Solution as a no-cost-added benefit to all Medallion Projects that utilize our Fund Administration Solutions.
Q: How does that work, exactly?
A: First, it is the issuer’s responsibility to generate a K-1 for each investor. We work with issuers to establish a document naming convention for each individual project, to ease organization.
Then, rather than physically mail (or attempt to mail) the K-1 forms to investors, we instead upload them electronically to our Secure Portal. Each investor already has access to the Portal, with a personal login, for the purposes of monitoring their funds’ and EB-5 petition’s statuses.
Q: And then the investors are notified directly?
A: Correct. From there, we send an email from our system to the investors, alerting them that their tax documents have been uploaded and that they may access them through our Secure Portal site.
Q: Can an EB-5 project use the Investor Portal to distribute other important information to investors?
A: Absolutely. As with K-1s, any sensitive document that needs to be securely syndicated to investors can be distributed in the same manner. We use templates in our email communications that can be worded appropriately to identify the type of document being distributed.
This process is easier and much more secure than traditional methods.