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House, Senate differ on treating carried interest

Sen. Chuck Grassley, R-Iowa, says the Senate Finance Committee will likely change the current treatment of carried interest.

The House tax reform bill addresses the issue of carried interest.

So far, the Senate bill does not.

Sen. Chuck Grassley, R-Iowa, said Nov. 9 that the Senate Finance Committee will likely change the current treatment when it considers its plan.

Carried interest is a perennial tax reform lightning rod because fund managers pay a lower capital gains tax rate on their share of a fund's profit, typically 20%, instead of the ordinary income tax rate of up to 39.6%.

Despite President Donald Trump's campaign pledge to cut off hedge fund managers' ability to benefit from the provision, carried interest is a bigger deal for private equity and similar firms.

The House plan allows for capital gains treatment of carried interest only for investments held at least three years. According to Seattle-based PitchBook Data Inc., 24.3% of private equity deals in the U.S. since 2000 would have been impacted if the carried interest tax treatment had been in place.

If passed, investments held for shorter periods may be less appealing for private equity firms or their investors. American Investment Council President and CEO Mike Sommers said that growth capital and private equity investors rely on carried interest to partner with pension funds, endowments and other institutional investors to build companies. Changing the tax treatment "discourages investment and jeopardizes economic growth," he said.