Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. Legislation
March 19, 2018 01:00 AM

Carried interest lives on despite tax reform

Many loopholes in law show nothing really has changed

Hazel Bradford
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Andrew Harrer/Bloomberg
    Steven Rosenthal said the law is 'so riddled with loopholes' that to 'fix anything is meaningless.'

    The fate of carried interest before and after 2017's tax reform drama is emblematic of the process overall: a rush to produce something regardless of whether there was true change, or in some cases, accuracy, experts said.

    "The new carried interest rule was drafted to give the appearance of closing a loophole without actually doing anything. It's so riddled with loopholes that to try to fix anything is meaningless," said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center in Washington. "Congress felt obliged to do something about carried interest — and still they haven't closed it."

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

    Following campaign promises by President Donald Trump that he would do away with it, carried interest was one of the lightning rods during the tax reform debate. Yet instead of an outright repeal, the final outcome required that a fund's general partners hold the relevant investments for three years, instead of one, starting in 2018.

    "The final statute was a bit of a relief for private equity and venture capital, which came out relatively unscathed," said Joe Pacello, a tax partner in BDO USA LLP's asset management group in New York. Tax experts also note that a technical mistake in the bill's wording means real estate investment firms — which were supposed to be limited to the same three years — are not affected, due to an incorrect tax code reference.

    "Hedge funds, on the other hand, were significantly hurt by this because their investment horizons are typically much shorter," said Mr. Pacello. Despite that, "I don't think carried interest is going to go away or come ​ to an end."

    Some private fund managers found an even bigger opportunity to keep the carried interest advantage in the tax law's exemption for corporations. That led them to quickly set up corporate structures for executives entitled to receive carried interest, before a March 15 deadline to declare that status.

    "There was a flurry of activity," said Mr. Pacello of BDO.

    Treasury Secretary Steven Mnuchin promised to quickly close that loophole. On March 1, his department and the IRS issued a notice clarifying that S corporations are subject to the longer holding periods and that it will soon issue regulations.

    The IRS announcement fell largely on deaf ears, with some tax experts questioning its legal authority to change the new law. The March 1 notice, critics said, did not have the typical IRS legal justification for issuing a new rule.

    That could shift the debate back to Congress, or set the stage for legal challenges by firms if and when the IRS pursues enforcement.

    "I think this needs to be addressed through a technical correction, either in the courts or Congress," said Mr. Pacello of BDO. "The IRS and Treasury are making it clear that they are going to attack this. That notice is just a notice to the industry, although it could be years before this get resolved."

    Mr. Rosenthal of the Tax Policy Center thinks the IRS exceeded its authority because the law simply refers to corporations. "It was poorly drafted. This was not normal, to cram a bill through as fast as you can without hearings. It will have to be changed legislatively. They should go back to the drawing board."

    Louis Tuchman, a partner at law firm Herrick Feinstein LLP in New York who chairs the tax department, agreed the tax law "was quickly put together." He is somewhat leery of what could happen in the future if the rush by fund managers to form S corporations continues. It could hamstring firms that pursue that option if they run into other tax restrictions on S corporations that are often hard to undo.

    "Easy to get in, impossible to get out," Mr. Tuchman said.

    There is also the federal tax issue and sensitivity over carried interest in general. "It's hard to defend the loophole for an S corporation from a policy point of view, and therefore I would expect it to be fixed," Mr. Tuchman said.

    In the meantime, Democrats are hoping to keep the spotlight on the carried interest advantage enjoyed by a select few in the highest tax brackets by appealing to Mr. Trump's desire to push an infrastructure agenda. Doing away with carried interest and other changes altogether could help pay for some projects, they said.

    On March 7, Democrats unveiled their own infrastructure plan. Just closing this carried interest loophole, they said, would increase federal revenues by $12 billion over 10 years.

    Related Articles
    New York governor proposes bill to tax carried interest as ordinary income
    IRS to close carried interest loophole for S corporations
    Mnuchin's move to end hedge fund loophole seen facing challenge
    More businesses to qualify for 20% tax reduction under Treasury pass-through gu…
    Recommended for You
    Senate Majority Leader Chuck Schumer (D-NY) gives the thumbs up as he leaves the Senate Chamber after passage of the Inflation Reduction Act.
    Senate Democrats nix private equity tax in climate, prescription drug bill
    capitol_at_dusk_washington_1550-main_i.jpg
    Carried interest provision cut from Senate Democrats' reconciliation bill
    The U.S. Capitol at dawn in Washington on Jan. 4, 2021
    Bipartisan bill eyes granting CFTC oversight of bitcoin, ether
    Private Markets
    Sponsored Content: Private Markets

    Reader Poll

    July 29, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Gaining Momentum: Where Next for Trend-Following?
    The market opportunity in U.S. residential mortgage-backed securities
    Credit Indices Evolve with Enhanced Data Inputs
    Hedge Funds 2.0: Back to the future
    How Has 2022's Carnage Reshaped Global Stock and Bond Markets?
    Crossroads: Politics, Inflation, & Bonds
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    August 1, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit