Every investment vehicle formed by Sydecar is an LLC classified as a partnership for U.S. tax purposes. U.S. partnerships are pass-through entities, meaning that all income and expenses pass through to the members whether or not the partnership has distributed any income. Therefore, you may have taxable income even if you did not receive a cash distribution.
The two most common reasons for reporting taxable income are:
Convertible Note Interest: Under U.S. tax law, interest that accrues on convertible notes during a period must be included in taxable income even if the company does not pay it.
Pass-through Income from LLCs and Partnerships: If your SPV invests into a pass-through entity, that entity may pass through taxable income such as interest, capital gains, or dividends, to your investment entity without a corresponding cash distribution. This allocation flows through to your K-1 and K-3.