It’s been two years since investors were able to claim tax write-offs for investment costs and advice, but lawyers have found a potential workaround hidden in years-old Internal Revenue Service regulations and case law that may cut tax bills for some private equity and hedge fund investors.

The strategy likely won’t generate a deduction as large as what was previously allowed for financial advisory fees. However, if investors are hiring third-party advisers for assistance picking complicated assets, including distressed debt and thinly-traded stocks, they may be able to recoup some of the lost tax benefits, according to a note that advisory firm RSM US LLP will send clients on Thursday.

The 2017 tax law eliminated the “miscellaneous itemized deduction” for investment management and financial planning fees if they exceeded 2% of taxpayer’s income. The change was a blow to investors who pay large sums to advisers on tax, legal and financial issues.

Now that these fees aren’t deductible, some may be “capitalizable,” or essentially included in the purchase cost of the asset, which would minimize the tax bill when the asset is sold. The IRS, in regulations dating back to 2003 and case law from the 1980s, has argued in favor of investors using this strategy, Don Susswein, a principal at RSM, said.

“This is absolutely the right answer as a matter of tax policy,” he said.

Pricing Assets

Here’s how it works: Investors can take the fees they pay to third-party financial advisers, lawyers, accountants, appraisers and others to facilitate the acquisition of an investment and include that cost in the total amount they paid for the asset, which is known as capitalizing an asset. When they sell the asset, the fee would be included in the total price paid for the asset, meaning the investor would be taxed on less gain.

For example, if an investor pays $100 for an asset and $10 finder’s fee to an adviser, then sells the asset later for $150, they’d only pay taxes on $40, rather than the full $50 of the assets appreciation.

This strategy could also apply to the amount paid for third-parties to investigate or pursue assets, including those acquired through a manged account or an investment partnership. For example, fees paid to advisers to find and select assets including loans, equity interest, derivative and royalty streams, could qualify.

It’s not a sure-fire tax strategy by any means. Investors won’t see tax savings for research fees they pay to pursue a deal that is never executed. Investors who mostly focus on passive investments probably can’t use this strategy. And it heavily depends on the “facts and circumstances” of the investment, Susswein said.

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