Democrats seek to eliminate ‘carried interest’ loophole

Tax Hot Topics newsletterSen. Tammy Baldwin (D-Wis.) and Rep. Bill Pascrell (D-N.J.) have introduced a new bill to raise the tax rate on the share of profits attributable to a general partner of an investment fund.

Under current law, those profits, also referred to as “carried interest,” may be taxed at the 20% long-term capital gains rate. Baldwin and Pascrell’s Carried Interest Fairness Act of 2019 would instead tax carried interest as ordinary income, subject to a top individual tax rate of 37%.

The two lawmakers leaned on past promises made by President Donald Trump in an effort to win favor for the legislation. As a candidate, Trump proposed ending the preferential tax treatment for carried interest. However, his signature legislative achievement thus far, the Tax Cuts and Jobs Act, merely limited the benefit by raising the holding period for qualifying investment assets from one year to three years. Profits from investments held for less than three years are treated as short-term capital gain and taxed as ordinary income.

The pay-as-you-go budget rules in place in the House could give revenue offsets like this more traction, but the tax treatment for carried interest has survived many attacks in the past. With Republicans still in charge of the White House and Senate, near-term enactment remains a long shot. The Congressional Budget Office estimates eliminating the preferential treatment for carried interest could raise $14 billion over 10 years.

Dustin Stamper
Managing Director
Washington National Tax Office
T  +1 202 861 4144

Omair Taher
Senior Associate
Washington National Tax Office
T  +1 202 861 4143

Tax professional standards statement 
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.