Tax Alert: Proposal to end carried interest loophole

At the beginning of February, President Trump outlined his tax priorities in a meeting with Republican lawmakers, revealing a few new proposals not previously mentioned on the campaign trail.  One notable item on his agenda is the push to end the so-called “carried interest loophole.”  

Around the same time, Senator Baldwin (D-WI) and her colleagues introduced the Carried Interest Fairness Act in the Senate, while Representatives Perez (WA-03) and Beyer (VA-08) put forth a similar version in the House.  Their aim is clear: “to eliminate a tax loophole that benefits wealthy money managers on Wall Street.”  As they argue, “[t]he current carried interest loophole allows investment managers to often pay almost half the tax rate compared to most [of their respective state’s] workers.”

Under the current tax code (IRC § 1061), general partners of private equity, venture capital, and real estate funds can structure their compensation to be taxed at a much lower long-term capital gains rate (e.g., a top federal rate of 20 percent) compared to the ordinary income tax rate that salary workers face (e.g., up to 37 percent).  The “carried interest” subject to this preferential tax treatment allows fund managers to receive a share of the fund’s profits at a higher rate than their actual capital investment warrants.

President Trump’s support for eliminating the carried interest loophole, alongside the two bills introduced in the House and the Senate, marks a significant and unexpected bipartisan shift in tax policy.  This stance signals a departure from the approach in the Tax Cuts and Jobs Act (TCJA) of 2017, which addressed carried interest by extending the holding period required to qualify for long-term capital gains treatment—from one year to three years.  Now, it seems the tax benefits for carried interest may face a full overhaul in the upcoming 2025 tax legislation.  With Trump’s backing and the growing need for revenue raisers to offset the extension of expiring provisions of the TCJA, even congressional Republicans may be inclined to reconsider their long-standing position on carried interest.

It’s important to note that we are still in the early stages of any potential carried interest reform, and its uncertain what form the legislation will take—or if it will pass at all.  We will continue to monitor the developments closely and provide updates as new details emerge.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.