United States: Update: Effect Of Proposed Us House And Senate Tax Bills On Family Offices And Investment Vehicles

For all the latest on US tax reform, please visit our microsite >>

On November 16, the US House of Representatives passed the "Tax Cut and Jobs Act." The bill's proposed effective date is January 1, 2018. Separately, the US Senate Finance Committee has released the legislative text of its own tax bill. The Senate is set to take up the bill following the Thanksgiving recess. Both the House and the Senate bill contain a number of provisions that may impact the operation of family offices and family investment vehicles.

Many dynastic families structure their affairs to be managed by a family office, often characterized as a partnership for US tax purposes. Additionally, within family wealth structures, families will typically consolidate investment assets in collective investment partnerships, such as family limited partnerships or limited liability companies.

The use of entities characterized as partnerships for business and investment activities with in-house investment professionals, whether related to business asset-management or investment services, is beneficial because it allows for the flow-through of tax attributes to the ultimate partners, while providing a mechanism for incentivizing those who participate in the management and operations of such vehicles. The following provisions of the House and Senate bills are relevant to family offices and investment structures:

The House bill would allow a portion of net business income allocated by pass-through entities, such as partnerships, limited liability companies, S corporations and sole proprietorships, to individual partners, owners, and shareholders to be subject to a maximum rate of 25%. In some cases, it appears that owners of family offices and family investment vehicles might benefit from this new rate structure as the maximum federal ordinary rate is currently 39.6%.

  • In determining what income qualifies as "business income" under the House bill, partners, owners and shareholders would be able to elect to: (1) treat 30% of their distributive share as business income, and 70% as wage income, or (2) determine the ratio of business income to wage income based on capital investment. However, an owner receiving income from passive business activities would be able to treat 100% of his distributive share as business income. Income currently subject to preferential rates, such as net long-term capital gains and qualified dividend income, would retain its character and would thus be excluded from business income. Professional service providers, such as doctors, lawyers, accountants and others, would not qualify for the new reduced rate on pass through business income.
  • The Senate bill contains a different structure for pass-through entities. The Senate bill would give pass-through business owners a 17.4% deduction on their income, which would effectively reduce the effective tax rate of pass-through business owners. The deduction would be limited to 50% of the taxpayer's allocable pro rata share of W-2 wages of a partnership or S corporation. Like the House bill, professional service providers, such as doctors, lawyers, accountants and others, would not be eligible for this deduction, with an exception for service income to taxpayers with taxable income below $150,000 for joint filers and $75,000 for others.
  • Both the House and the Senate bills have provisions affecting carried interest, which would limit long-term capital gain treatment to gains arising from the sale of assets held by a partnership for more than three years (as opposed to the normal one year rule), subject to certain exceptions.
  • The Senate bill would eliminate deductions for investment expenses, thereby making partnership incentive allocations to advisors all the more attractive from a deductibility perspective.
  • Both the House and the Senate bills contain provisions limiting interest deductibility. Effective for tax years beginning after 2017, the House bill would limit the deduction for net interest expenses incurred by a business in excess of 30% of the business's adjusted taxable income. Similarly, the Senate bill would limit the deduction for net interest expenses incurred by a business in excess of 30%. These limitations would not apply to qualifying small businesses with average annual gross receipts under $25 million (House) or $15 million (Senate) during the three preceding years, indexed for inflation. These limitations would not apply to real property business indebtedness.
  • The Senate bill contains a provision to prevent the use of active net operating losses to offset portfolio income. For example, this provision would prevent family offices from using actively managed real estate losses to offset portfolio income.
  • Finally, neither the House nor the Senate bill contain any provision to repeal the 3.8% net investment income tax. As such, family investment activities that often generate income associated with the net investment income tax would still be subject to this additional 3.8% levy.

President Trump has declared an end-of-year deadline for tax reform. Whether the House or the Senate bill (or a combination thereof) will garner the requisite votes remains to be seen. Nonetheless, if tax reform is signed into law, it will likely have a significant effect on family offices and family investment vehicles taxed as partnerships.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions