United States: Private Equity And Other Carried Interest Funds – Federal Tax Policy Tip Sheet: Issue 3

Thomas M Reynolds is a Senior Policy Advisor, Paolo Mastrangelo is a Senior Public Affairs Advisor and David C Whitestone is a Government Section Leader all in our Washington DC office.

The Top Line

The House Ways and Means Committee completed its marathon "markup" of the tax-reform bill this week, paving the way for a floor vote on the measure as soon as next week.

Meanwhile, Senate Republican leaders released their tax plan on Thursday, Nov. 9, initiating their own procedural sprint. Their plan diverges considerably from the House bill in several ways, including delaying a corporate tax rate cut until 2019 and making other cuts that are only temporary in nature. Significant changes to the Senate's plan and bill language are expected over the weekend.

Even more important to note is that the Senate is bound by tricky procedural rules that make it much more difficult to vote on legislation that increases the deficit after 10 years, which the House bill does. These large and small differences will make it more challenging to "conference" and negotiate out the differences between the two chamber's legislative proposals.

The Details

House Markup

  • Carried Interest: The big "surprise" for the markup was House Ways and Means Committee Chairman Kevin Brady (R-Texas) offering an amendment, adopted by the committee, related to carried interest. The amendment would increase the holding period for eligible investments to three years, with respect to gains on carried interest. This was an effort to capture at least some of these earnings without ending the practice altogether. We anticipate that this provision is still subject to change.
  • Pass-Throughs, Corporate Interest Deductibility and CapEx: Treatments of these remain largely unchanged from the initial text of the House bill. See our previous "Tip Sheet" issue for more information on each of these.

Senate Proposal

  • Carried Interest: No specific mention thus far, but watch for a change over the weekend or during the Senate Finance Markup.
    • The House bill increases holding to three years.
  • Interest Deductibility: Like the House bill, the Senate proposal generally caps interest deductibility at 30 percent of the business's adjusted taxable income.
    • For partnerships/net-income: Like the House bill, the Senate bill determines this level at the partnership level and ensures no double counting.
    • Small Businesses: The Senate bill exempts businesses with no more than $15 million in revenue, while the House version exempts those with $25 million and less.
  • CapEx: The Senate bill, like the House bill, allows full and immediate expensing (100 percent, for five years after enactment). We still caution that this level may change as revenue challenges heat up.
  • Pass-Throughs: The Senate bill gives pass-throughs a 17.4 percent deduction from their "domestic qualified business income."
    • The House bill sets a 25 percent deduction.

The Timing

On paper, it appears that the House and Senate are on track to pass reform before the end of 2017. But there are several upcoming reality checks. Procedurally, only 16 legislative days are left in the year – making the task of finishing committee markups, scheduling votes in each chamber, then conferencing and voting again in each chamber a tall order.

If things continue according to plan, the House will vote on its bill during the week of Nov. 13 and the Senate may vote on its bill as early as the week of Nov. 27. The Senate Finance Committee is expected to start its markup process no later than Tuesday, Nov. 14.

Moving forward, the now-evident substantive and budgetary differences between the House and Senate proposals provide ample opportunities for changes, stalling and protracted negotiations. Critically, these differences are significant sources of both intraparty and interparty disputes among Republicans and Democrats.

Holland & Knight's Public Policy & Regulation Group will continue to update on the topics above.

For more detail, reach out to Senior Policy Advisor Tom Reynolds, who is a former Republican member of Congress, elected House leader and senior member of the House Ways and Means Committee, or Senior Public Affairs Advisor Paolo Mastrangelo.

Did You Know?

Both Democrats and Republicans routinely mention "carried interest" in press releases, floor statements, tweets and even YouTube videos. As the graph below reflects, congressional interest in carried interest has ebbed and flowed since 2006, but the populist tone of the 2016 presidential election brought renewed attention to it – from both parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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