Private Equity and Other Carried Interest Funds – Federal Tax Policy Tip Sheet: Issue 4
The Top Line
The House of Representatives on Nov. 16, 2017, voted on and passed their tax reform bill, along party lines (227-205). Passage was expected in the House, where the GOP hold a significant enough majority needed to move the legislation without the support of Democrats, and with the opposition of a small handful of members of their own party.
Meanwhile, the Senate Finance Committee completed the markup of its tax reform legislation. The Senate's plan continues to diverge considerably from the House bill in several ways, causing both consternation and opportunity for detractors and champions of the legislation.
Last week provided fireworks as the House, Senate and stakeholders launched offensives on everything from reconciling differences with regard to corporate and individual rates, to state and local income tax deductions, and to the inclusion in the Senate bill of a measure to eliminate the Obamacare requirement that individuals have health coverage. The latter of which would save the federal government more than $300 billion over 10 years – which, policy aside would help the Senate Republicans avoid procedural hurdles. And to top it off, Sen. Ron Johnson (R-Wis.) announced his opposition to the Senate bill – making him the first Republican to do so, and with it, immediately jeopardizing the bill's chances of passing on the floor.
- No substantive changes: The House-passed legislation does not alter the provisions coming out of the Ways and Means Committee markup. Our previous Tip Sheet issue provides more information on treatment of carried, interest deductibility, pass-throughs, among other items.
Senate Marked-up Bill
- Carried Interest: No changes to carried interest made it into the Senate bill. This is still a big source of consternation for stakeholders and policymakers and we caution against assuming a change won't be made in the final package.
- The House bill increases holding to three years.
- Pass-Throughs: The Senate bill gives pass-throughs a 17.4 percent deduction from their "domestic qualified business income" – but this deduction expires after 2025. This is subject to change during further negotiations.
- The House bill sets a 25 percent deduction.
- Interest Deductibility: Both the Senate and House bills cap interest deductibility at 30 percent of the business' 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 (after Sept. 27, 2017, and before Jan. 1, 2023).
With the House for the moment finished with its work, the Senate may vote on its bill as early as the week of Nov. 27. But several battles in the chamber and protracted negotiations over substance and procedure may stall the process for at least a week.
If the Senate passes its bill, then both the House and Senate will need to agree to "go to conference." That agreement will then kick off the challenging process of reconciliation. In that case, watch for the Senate bill to become the base negotiation text – as the vote margins in the House will allow significantly more leeway than the Senate. But we caution that even getting to conference will be a Herculean feat at this point.
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?
In the past year, tax reform has become an almost ethereal goal for politicians, and especially for the Republican party. Members of Congress consistently have discussed "tax reform" in public statements, floor debates and legislative proposals, and the data proves that Democrats seem far less interested in discussing it.
Below is a chart showing the whopping difference in the number of times each party has mentioned "tax reform" this past year. This includes tweets, Facebook posts, press releases, YouTube videos, newsletters, floor statements, Instagram posts and other sources.
- Source: Quorum Analytics
- View Enlarged Image
And on an equally interesting note, we can break down these mentions of tax reform one more level, by state. The graph below shows how some members of Congress of particular states have a disproportionate share or interest in mentioning tax reform.
- Source: Quorum Analytics
- View Enlarged Image
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.