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IRS Will Close Carried Interests Tax Loophole

by Mike Godfrey, Tax-News.com, Washington

07 March 2018


The Internal Revenue Service has said it will soon issue regulations to confirm that S corporations are also subject to the three-year holding period for partnerships interests introduced in the Tax Cuts and Jobs Act, to prevent individuals from circumventing the measure.

The change concerns carried interest –  ownership interests in a partnership that share in the partnership's net profits. Carried interests are often issued to investment managers in connection with the investment manager's services. These interests often result in the holder receiving capital gains that are taxed at a lower rate, rather than ordinary income.

The Tax Cuts and Jobs Act extended the holding period with respect to certain carried interests (i.e. applicable partnership interests) to three years to access the concessionary tax treatment. However, concerns have since been raised that hedge fund managers are avoiding the new rules by creating shell companies in Delaware to avoid the three-year restriction, which currently covers only individuals.

In February, Treasury Secretary Steven Mnuchin acknowledged these concerns in front of the Senate Finance Committee, and promised that new guidance would be issued by the end of the month after consultation with the IRS and Treasury.

Although no official guidance has yet been released, the IRS on March 1 issued a notice confirming that it would issue regulations to clarify that taxpayers will not be able to circumvent the three-year rule by using S corporations.

"Under the tax reform law, the three-year rule took effect for tax years beginning after December 31, 2017. Treasury and IRS intend to issue regulations that are also effective for tax years beginning after that date," said the agency.

TAGS: individuals | Finance | tax | investment | interest | law | Internal Revenue Service (IRS) | United States | tax reform | regulation | services | Tax

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