Senate Finance Committee Chair Ron Wyden, D-Ore., and Sen. Sheldon Whitehouse, D-R.I., recently introduced legislation (S. 2617) to change the tax treatment and timing of carried interest income.
Unlike other Democratic proposals targeting profit’s interest in certain investment services partnerships, this bill would go beyond merely recharacterizing income from capital to ordinary. Specifically, the legislation would require certain taxpayers to recognize annually, a “deemed compensation amount” as ordinary income and an equivalent amount as a long-term capital loss. Annual compensation would be determined using “the estimated forgone interest on an implicit interest-free loan from investors to the fund manager at a prescribed interest rate.”
The bill also would require partners holding carried interests in exchange for providing services to various investment partnerships to recognize deemed compensation income each year regardless of whether the investment partnership recognizes income or gain and regardless of whether the service providers receive distributions of their carried interests. This deemed compensation income would be subject to income tax at ordinary income rates and self-employment taxes.
Democrats have targeted carried interest as a potential “pay-for” for the large reconciliation package expected this fall, but there are several different potential versions. Wyden’s new bill is the most aggressive and would raise the most revenue, but could generate opposition from Democrats more sympathetic to the investment industry. The Joint Committee on Taxation estimates Wyden’s bill would raise $63 billion over 10 years.
Dustin Stamper is a managing director in Grant Thornton’s Washington National Tax Office and leads the tax legislative affairs practice for the firm.
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