Blog Posts Tagged With Carried Interest

Subscribe to Carried Interest RSS Feed

Comparison of the Final House and Senate Bills

While the last-minute changes made to the Senate Bill brought the House and Senate Bills closer together, a number of important differences remain.  The House and Senate will attempt to hammer out these differences over the next few weeks in conference committee. In the meantime, we have prepared a comparison of the more salient provisions of the two bills.

You can view the full text of the bills on our House Bill Navigator and Senate Bill Navigator. We also ran a comparison of the final Senate Bill against the initial legislative text, which is available here.
Continue Reading

Comparing the House and Senate Tax Proposals Affecting Private Equity

The House and Senate versions of the Tax Cuts and Jobs Act would each have a significant impact on private equity firms, investors and portfolio companies.

We have prepared a presentation that summarizes many of the relevant provisions as they currently stand in each version and highlights their differing impact on private equity. This follows our post from last week highlighting the provisions in the House tax bill affecting private equity.
Continue Reading

More on the Senate Mark’s Taxation of Pass-Through Business Income

The Senate’s tax reform mark provides for favorable tax treatment of so-called “pass-through” business income derived by individuals by permitting an individual taxpayer generally to deduct 17.4% of “domestic qualified business income” from a partnership, S corporation, or sole proprietorship. The House tax bill, by contrast, provides a special 25% maximum rate on certain types of business income derived by individuals through partnerships, S corporations or sole proprietorships.

The Senate proposal also introduces a new rule, that is not in the House bill, that would require a non-U.S. shareholder to treat all or a portion of the gain from the sale of an interest in a U.S.
Continue Reading

The House Tax Bill Provisions Affecting Private Equity

The House tax bill contains several provisions that could significantly affect private equity sponsors, investors and portfolio companies. Below we have highlighted a number of these proposals, including discussions of:

Carried Interest. The House bill generally would limit the favorable taxation of carried interest to investments that have a holding period of more than three years, and treat carried interest attributable to gains on investments held for three years or less as short-term capital gain (taxed at the rates applicable to ordinary income).
Continue Reading

Ways and Means Adopts Amendment Reforming Treatment of Carried Interest

The House Ways and Means Committee has adopted Chairman Kevin Brady’s (R-TX) amendments to the House tax bill containing a provision addressing “carried interest.”  “Carried interest” is the term commonly used for an equity interest in a partnership that entitles the holder to a share of the partnership’s profits that is larger than the holder’s percentage interest in the capital invested in the partnership.  Under current law, a carried interest is treated in the same manner as any other partnership interest, with the result that the character of the income and gains recognized by the partnership (e.g., as long-term capital gain, short-term capital gain or ordinary income) flows through to the partner.
Continue Reading

Brady’s Amendment at a Glance

Last night Chairman Brady released the first set of amendments to the Chairman’s Mark released last Friday. We have incorporated these amendments into the text of the Chairman’s Mark and have generated a PDF comparison showing the revised sections, which you can find here.  Click here for a comparison that shows the entirety of the bill’s text.

In addition to modifying the earned income tax credit, the Chairman’s amendment limits the favorable taxation of “carried interest,” so that long-term capital gains rates will apply only to gains from investments that have been held for more than 3 years. To address concerns around the House bill’s treatment of deferred compensation in the context of start-ups, the amendment also adds a provision that would defer the recognition of income on the exercise of compensatory options or the settlement of restricted stock units issued to certain employees of private companies for up to five years (in limited circumstances).
Continue Reading

More on the House Bill’s Proposed Taxation of Pass-Through Income

One of the more anticipated features of the House tax bill was a proposal to apply a special reduced tax rate to business income derived by individuals through sole proprietorships, partnerships and other pass-through entities and arrangements. We have previously written about the proposal from a private equity perspective as well as from an overall tax policy perspective.

The bill follows through on the proposal and introduces a special 25% maximum rate on “qualified business income” derived by individuals, but imposes several limitations on eligibility designed to prevent the conversion of wages and other personal services income into business income.
Continue Reading

Tax Reform and Revenue Raisers

One of the biggest challenges facing lawmakers in the current tax reform process is finding a way to reduce headline tax rates in a revenue neutral way. Some revenue raisers (like eliminating itemized deductions) would raise significant revenue and simplify the tax code. Other revenue raisers come at the cost of increased complexity, at least in the short term (e.g., implementing a federal VAT or a new carbon tax). Closer inspection of ideas on the table reveals that politically popular reforms are not necessarily the largest revenue raisers. For example, there seems to be bipartisan support for taxing carried interest as ordinary income (more on that here), a relatively small revenue raiser.
Continue Reading

Tax Reform and the Treatment of Carried Interest

The favorable tax treatment of so-called “carried interest” that is earned by private equity managers gained a considerable amount of attention from both parties during the 2016 presidential campaign. President Trump has repeatedly called for its elimination, a goal that Treasury Secretary Mnuchin reaffirmed in remarks that he made last Friday.

This is not a new issue. In recent years, there has been a series of legislative proposals to turn off the “flow-through” character, in whole or in part, of partnership allocations of long-term capital gain in respect of carried interest and, instead, to treat all or a portion of those allocations as ordinary income.
Continue Reading

The Problem of Pass-Throughs and Tax Reform

Any overhaul of the taxation of business income must address the difficult question of how to deal with pass-throughs. Most businesses in the United States are organized as pass-throughs and, since 1998, pass-throughs have earned more income than C corporations in every year except 2005. (Read the study here.) This post explains the challenges of dealing with pass-throughs in tax reform, and outlines the various ideas on the table.

Current Law Rate Differential.  Under current law, pass-throughs are not subject to U.S. federal income tax at the entity level. Instead the owners take their shares of the pass-through’s taxable income into account for purposes of determining their own tax liability, with the character of the various items of income, gain, loss and deduction generally being determined at the level of the pass-through and flowing through to the owners.
Continue Reading

LexBlog