IRS headquarters in Washington, DC
Photographer: Samuel Corum / Bloomberg
Photographer: Samuel Corum / Bloomberg
The Revenue Service released rules restricting valuable tax breaks that hedge fund managers could claim following an error in Republican tax law 2017.
The rules, unveiled Thursday, prohibit money managers from using business organizations, known as S corporations, to take advantage of exemptions from the law’s rules for taxing interest.
The rules address what some tax policy experts see as a mistake in the 2017 tax review that will allow hedge fund managers to take advantage of a gap so they don’t pay higher taxes on their investments. The Treasury Department first issued a statement in early 2018 outlining plans to reverse the conduct interest rules.
Interest borne is the proportion of investment fund proceeds paid to hedge and private equity managers, venture capitalists, and some property investors who are eligible for lower tax rates.
Tax law extended hedge funds and private equity managers had to keep their investments – to three years from one year – to achieve the 20% long-term capital gain. Furthermore, they had to pay individual income tax rates, which are now at 37%.
But the 2017 law exempted corporations from holding property longer before they were entitled to the favorable tax rates. Hedge funds found a way to use that exemption by setting up a series of corporate S and limited companies limited to managers who are entitled to share interest-bearing payments, allowing them to qualify for the rates. lower faster. The so-called C corporations, the common structure for most public commercial companies, are not subject to the three-year ownership period.
Some experts question whether the IRS has the authority to impose this restriction through regulation, as tax law does not impose a restriction on the type of corporations that can access the. break. A recent U.S. Court of Appeals ruling recommended the same, saying the IRS could struggle to defend the rules in future legal battles.
The rules of conduct interest are a politically sensitive issue. President Donald Trump has vowed, ahead of the 2017 tax law, to end tax breaks, which are popular with some business-friendly party members. Ultimately, the review reversed the benefits of carrying interest, rather than reversing them altogether.
Democrats have proposed legislation for years that would end interest rate cuts. These efforts have largely been symbolic as the Democratic – led House could not get a Republican majority in the Senate on board.
However, the tax break could be reversed once Joe Biden becomes president, as Democrats now control every chamber of Congress with thin margins. The interest breakdown has borne relatively little for tax expenditures – costing about $ 14 billion over a decade.