IRS to close carried interest loophole for S corporations

The IRS clarified on Thursday that S corporations are subject to the longer holding periods for claiming carried interest enacted in the Tax Cuts and Jobs Act, and said that it will soon issue regulations.

The change, which takes effect for tax years after Dec. 31, 2017, extended the holding period to three years from one year.

The upcoming regulations will clarify that taxpayers will not be able to circumvent the three-year rule by using S corporations, the IRS said in a notice on its website.

Treasury Secretary Steven Mnuchin told the Senate Finance Committee on Feb. 14 that the IRS would close the loophole that some hedge fund managers were reportedly exploiting to avoid paying regular, higher tax rates by forming S corporations.

Carried interest is the portion of an investment fund's returns eligible for a tax rate of 23.8% instead of the ordinary income tax rate up to 37%.