Senate Finance tax reform package mirrors House on carried interest, endowments tax

The Senate Finance Committee late Thursday approved its version of tax reform, hours after the House of Representatives finished its bill, both largely along party lines with 13 House Republicans opposing it.

The Senate version ended up keeping intact the tax treatment of 401(k) contributions, the same as the House bill. Both versions also call for adding a new 1.4% tax on large private university endowments' net investment income.

Public pension funds would see a new tax on unrelated business income from alternative investments such as real estate and private equity from both versions, although the Senate Finance bill differs on how the tax owed would be calculated.

Deductibility of interest by private equity and other firms is capped at 30% of adjusted income in both bills, with some exceptions for real estate.

Private equity, real estate and venture capital firms won a lower, 25% tax treatment of pass-through business income for partnerships in the House bill, while the Senate Finance version calls instead for a 17.4% tax deduction on up to 50% on certain wages.

The politically charged topic of carried interest was only addressed in the House bill until a last-minute amendment was approved by the Senate Finance Committee. Both versions limit partners' ability to pay a lower capital gains rate to investments held for at least three years.

House and Senate negotiators will have to reconcile their bills' differences to produce a final package; that process is not expected to start until late November.