Do not accrue management fees unless you are crazy

In our fund we take the management fees out of the partners' capital accounts. By this I mean we do not take the 1% management fee in the form of an allocation to the General Partner. We take the management fee all the way out of the fund.

This I think is the way most funds should operate.

To drill down into a bit more detail, we actually charge the LP's capital accounts 0.25% at the beginning of each quarter. In technical terms this means we charge our management fee "quarterly in advance."

None of this has anything to do with "accruing" management fees. That's a different subject. I wanted to get everything setup first before diving into that discussion.

When you charge management fees in FundCount (i.e. when you do the management fee transaction in the database), you have the option to select "Accrued" or "Final Charge" for the type.

Now, when we first started doing the actual management fee transaction in FundCount we stupidly selected the "Accrued" option. (Again, you have two choices, 1. Accrued or 2. Final charge.)

If you select "Accrued" you are going to create a major headache for yourself when it's time to do the audit and when it's time to do the tax returns.

FundCount does not recognize accrued management fees as a deductible expense on the tax forms it generates. It only recognizes "final charge" management fees as a deductible expense for the given tax year.

Therefore, save yourself a major headache and don't ever accrue management fees. Only do that if you are crazy (and really want to go nuts at tax time).