November 3, 2017

Private Equity and Other Carried Interest Funds – Federal Tax Policy Tip Sheet: Issue 2

Holland & Knight Alert
Thomas M. Reynolds | David C. Whitestone

The Top Line

House GOP leaders on Thursday, Nov. 2, released their anticipated tax-reform proposal. Entitled the "Tax Cuts and Jobs Act," the House Bill includes several proposed changes to the corporate and individual tax system.

From a policy perspective, the bill's proposed changes are in line with the past several months of public debate. From a political perspective, our analysis and discussion with key stakeholders leads us to believe that the bill could be substantially altered as soon as this weekend – in anticipation of its scheduled markup in the House Ways and Means Committee on Monday, Nov. 6. This path in the House will allow the legislation to keep moving while also resolving the big-ticket challenges facing the Republican caucus.

The Senate is expected to release its own proposal next week.

The Details

  • Carried Interest: There is no mention in the released text of any changes to carried interest.
  • Pass-Throughs: As anticipated, the House bill allows a portion of net income distributed by a pass-through entity to an owner or shareholder to be treated as "business income" subject to a maximum rate of 25 percent. We caution that the details of this will change – making its impact on investment firms clearer – and are subject to continuing political and policy debate.
  • Corporate Interest Deductibility: Generally, for most businesses interest deductibility is capped at 30 percent of the business's adjusted taxable income.
    • For partnerships/net-income: This would be determined at the partnership level instead of the partner level. It also allows a pass-through's unused interest limitation for the taxable year to be used by the pass-through's owners and to ensure that net income from pass-through's would not be double counted at the partner level.
    • Small business exception: Businesses with average gross receipts of $25 million or less would be exempt.
    • Domestic companies that are part of an international financial reporting group (IFR): The deductible interest is limited for U.S. corporations that are members of an IFR.
  • CapEx: In an effort to mitigate the impacts in interest deductibility changes, the House bill allows full and immediate expensing (100 percent, for five years after enactment). This may change, in tandem with interest deductibility levels, as revenue needs change during congressional negotiations.
  • Repeal of Rollover of Publicly Traded Securities Gain into SBICs: The House bill terminates the ability of an individual or corporation to roll over capital gains realized on the sale of publicly traded securities when the proceeds are used to purchase common stock or a partnership interest in a specialized small business investment corporation (SSBIC).
  • Repeal of Technical Termination of Partnerships: The House bill terminates the ability for partnerships to carry out "technical terminations" – i.e., when a partnership terminates only if within a 12-month period there is a sale or exchange of 50 percent or more of the total interests in partnership capital and profits.

The Timing

With only a handful of legislative days left, we still believe that passing tax legislation by the end of the calendar year is an ambitious target. The House's first move is an important step, which will be followed by the Senate releasing its own draft language. However, both chambers will need to pass their bills separately, then survive an arduous conference process to resolve both substantive and technical differences before the product can be signed into law by the President.

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?

The congressional leaders tasked with shepherding tax reform are Rep. Kevin Brady (R-Texas), Chair of the House Ways and Means Committee, and Sen. Orrin Hatch (R-Utah), Chair of the Senate Finance Committee.

Based on the current Congress (115th), here are some interesting stats about the two GOP leaders, painting contrasting pictures about their respective abilities to move legislation – or perhaps simply to navigate the proclivities and limitations of their own chambers.

Sen. Hatch

  • Number of Sponsored Bills: 776 (he is ranked first in his party for highest amount)
  • Number of Sponsored Bills Enacted into Law: 57 (again, first among Republicans)
  • Number of Sponsored Bills That Leave Committee: 211 (second among Republicans)

Rep. Brady

  • Number of Sponsored Bills: 151 (Ranked 21st among Republicans)
  • Number of Sponsored Bills Enacted into Law: 9 (15th among Republicans)
  • Number of Sponsored Bills That Leave Committee: 22 (20th among Republicans)

Source: Quorum Analytics   

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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