Schedule K-1s, shortened to “K-1s,” are used to inform investors about their share of income and expenses in an investment. Investors use this information when filing their tax returns. Specifically, they take into account the gains, losses, interest, dividends, and other distributions (known as “taxable events”) from an investment vehicle (including an SPV or fund). An investment vehicle must issue K-1s to investors every year in which a taxable event occurs. These forms are due to investors by March 15, giving investors time to include them in their own tax returns before their April 15th deadline.

Why do K-1s have such a bad reputation?

Typically, the preparation of a single entity’s K-1s takes days of manual work by deal sponsors, fund administrators, and accountants who have to review the entity's financial statements, determine the allocation of income, deductions, and credits, fill out the K-1 form for each beneficiary, and distribute the forms. At tax season, fund administrators who support hundreds or thousands of investment vehicles are left scrambling to prepare tax returns for up to tens of thousands of investors. This process quickly becomes arduous, costly, and often results in missed deadlines given the manual labor and variability involved. Venture investors have become accustomed to filing an extension on their personal taxes due to delayed K-1 distributions from their investments.   

Can we automate K-1s? 

Sydecar proudly delivered thousands of completed K-1 forms to investors starting in the first week of February. As of February 28th, we delivered 100% of K-1s to investors who participated in an investment into a private company.

The foundation of Sydecar’s product is a proprietary ledger system that records all accounting events within an SPV or fund. There are a number of different events that could occur in an investment vehicle: an investor contributes capital; capital is invested into a company; capital is paid back to investors; an investor sells their interest in a fund to someone else. Because we standardized our SPV and Fund structures, Sydecar is able to automatically record everything that happens within them. In contrast, traditional fund administrators support a wide variety of SPVs and funds with non-standard structures, which requires tax and financial reporting to be done manually. Many of these companies elect to use off-the-shelf software and hire accountants to manually enter data.

Rather than hiring accountants to work through each vehicle and the individual investor’s allocations manually, Sydecar’s product connects ledger data directly to our tax software and inputs the values for each investor instantaneously. With our K-1s generated and distributed by the product, our process was overseeing data integrity and reviewing any special circumstances that may arise. This automated process allowed the team to avoid the hours of manual inputs, review, and corrections to human errors which can lead to significant delays.

Through standardization and our ledger, Sydecar has been able to deliver K-1s not just on time, but early, easing the stress for deal leads, accountants, and investors alike this tax season. We are excited to continue building the rails for an easier tax and compliance process for private market investors.