The Internal Revenue Service 9iRS) gave notice Thursday that it intends to issue Regulations aimed at Eliminating a Loophole in the new Federal Tax Law that Grants Fund Managers a Preferential Tax Rate on Carried Interest Earnings.
Under the Tax Cuts and Jobs Act, P.L. 115-97, Fund Promoters have a 20% Capital Gains Rate on carried Interest if certain Partnership Interests are held for at least Three Years.
However, this Requirement does not apply when Payments are made to Corporations as opposed to Individuals.
The Guidance informs Taxpayers that Regulations will be issued Barring Money Managers from using S-Corporations to take Advantage of an Exemption to New Rules for Carried Interest contained in President Trump’s Tax Legislation.
Treasury Secretary Steven Mnuchin told a Senate Panel on Feb. 14th that a Bloomberg News Story, which Detailed how Hedge Funds created Scores of Shell Companies to work around the New Carried-Profit Rules, prompted him to instruct Administration Officials to issue Guidance. Some Experts question whether the IRS has the Authority to put this Restriction in place through Regulation, given that the Tax Law doesn’t include a Limitation on the Type of Corporations that can Access the Tax Break.
President Trump turned Carried Interest into a rallying cry during his Presidential Campaign, declaring that “hedge fund guys are getting away with murder.” But under Pressure from Industry Lobbyists and Exploiting a split among White House Advisers, the Republican Congress in December failed to Fulfill Trump’s Promise to End the Tax Windfall enjoyed by Money Managers.
The New Tax Law requires Hedge Funds and Private-Equity Players to hold Investments for at least Three Years to get the Lower Capital Gains Rate, rather than One year under the old Law. The New Guidance could put an end to Hedge Fund Managers’ Plans to create numerous Shell Companies in Delaware, Corporate America’s Favorite Tax Jurisdiction, to get around the Requirement that Assets must be held for Three years to Qualify for a Lower Tax Rate.
Carried Interest is the Portion of an Investment Fund’s Returns that are Paid to Hedge Fund and Private-Equity Managers, Venture Capitalists, and certain Real Estate Investors. For Federal Tax purposes, it’s Eligible for a Tax Rate of 23.8%, which includes a 3.8% Tax on Investment Income imposed by the Affordable Care Act, on Sales of assets held for at least Three years. Otherwise, Managers face a Top Federal Income Tax Rate of 37%.
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