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Industry tax guide

Financial services tax and accounting

Tax planning for fee income, partner allocations and the software financial firms build.

Financial Services business environment

Investment advisers, fund managers, broker-dealers and fintech companies earn management and performance fees, allocate income to partners in many states, and spend heavily on technology.

Their tax issues are specific: how carried interest is taxed, whether owners get the qualified business income deduction, and whether internal software development qualifies for the research credit.

Compared with a general business

What makes taxes different for financial services

Carried interest holding period

Profits interests need a three-year holding period for long-term capital gain treatment.

Specified service income

Investment management and brokerage income is specified service income for the QBI deduction.

Fund-level reporting

Funds issue K-1s to many investors, with tax basis capital accounts, state withholding and often foreign investor reporting.

Mark-to-market and trader rules

Dealers and electing traders can use mark-to-market accounting, which changes the character and timing of gains.

The rules in detail

Tax rules for financial services

Carried interest and the three-year rule

Gain allocated to a fund manager's profits interest is treated as long-term capital gain only if the underlying assets were held more than three years. Gains on assets held three years or less are taxed as short-term gain.

Financial services and the QBI deduction

Investment management, brokerage and financial services are specified service trades. Owners above the income threshold lose the 20% qualified business income deduction for that income, which makes entity structure and owner compensation decisions more important.

Internal-use software and the R&D credit

Software built for a firm's own back-office use must pass a higher threshold of innovation test to qualify for the research credit. Software offered to clients, or used to interact with them, is evaluated under the regular rules.

Planning moves

Ways to save tax in financial services

  1. Use management fee waivers carefully

    Converting fees into profits interests can change ordinary income to capital gain when properly structured.

  2. Make the PTET election

    Entity-level state tax lets partners deduct state tax above the federal SALT cap.

  3. Claim the research credit on platforms

    Client-facing software and trading systems can qualify.

  4. Set compensation to support QBI where available

    Owners below the threshold keep the deduction with the right salary and structure.

  5. Fund partner retirement plans

    Cash balance plans allow large deductible contributions for senior partners.

  6. Coordinate state residency

    Partners moving between states plan the move date and sourcing of carried interest.

Working with OICPA

How we help

Service

Plan partner allocations and fee structures

Management fee waivers, profits interests and holding periods modeled before the year closes.

Business Tax Advisory
Service

Research credit for platforms and tools

Client-facing platforms and trading or risk systems reviewed for qualified research.

R&D Tax Credit
Service

A dependable monthly close

Fee reconciliations, accruals and entity-level reporting closed on a fixed calendar.

Month-End Close

Bookkeeping and reporting

The accounting behind the tax work

Reconcile receipts to agreements and document entity allocations; coordinate specialized regulatory matters with your compliance advisers.

The operating challenge

Management fees, performance-linked receipts, shared costs, and multiple entities can make both revenue reconciliation and owner reporting difficult.

The records that matter

Fee agreements, custodian or platform statements, expense allocations, and partnership records give the review a practical starting point. We identify missing information before recommending changes.

What you can expect

  • A prioritized review of the industry-specific accounting issues above
  • A tailored reporting and document checklist based on your operating records
  • An agreed action plan connecting financial reporting, tax deadlines, and specialist coordination

Frequently asked questions

Does the three-year rule apply to our fund?

It applies to profits interests held in connection with investment management services. Gains on assets the fund held for more than three years keep long-term treatment.

Can an advisory firm owner take the QBI deduction?

Below the income threshold, yes. Above the phase-out range it is lost for specified service income such as investment management.

Does our trading software qualify for the R&D credit?

It can. Software used with clients or third parties is tested under the regular four-part test; purely internal software must also meet the higher threshold of innovation test.

Related articles

References

  1. 26 U.S. Code § 1061: Partnership interests held in connection with performance of servicesLegal Information Institute, Cornell Law School
  2. 26 U.S. Code § 199A: Qualified business incomeLegal Information Institute, Cornell Law School
  3. 26 U.S. Code § 41: Credit for increasing research activitiesLegal Information Institute, Cornell Law School

Rules reflect federal tax law as of November 2026.