Tax Takeaways for Private Equity

New Tax Takeaway | February 2022

TAX CONSIDERATIONS FOR PRIVATE EQUITY FUNDS AND INVESTORS

The federal income tax rules that apply to private equity funds and investors have been the subject of much debate. Private equity funds and fund investors should continue monitoring proposed legislation for tax considerations.

 Tax Takeaways for Private Equity

• Recent proposals in both the House and Senate have sought to either further extend the holding period requirement for long-term capital gain treatment from three to five years or effectively tax all carried interest allocations as ordinary income, except in the case of taxpayers with taxable income below $400,000.
• H.R. 5376 in its current form would limit the gain exclusion for Qualified Small Business Stock to 50% for dispositions occurring after September 13, 2021, subject to a binding contract exception.
• H.R. 5376 would ensure that all trade or business income earned by high-income taxpayers (taxpayers with adjusted gross income in excess of $400,000) is subject to either the NIIT or self-employment tax. If enacted, the proposed legislation would result in fund managers earning more than $400,000 paying either self-employment tax or NIIT on their distributive shares of partnership income at a likely rate of 3.8%.
• Partnerships, including private equity funds, that have items relevant to the determination of the U.S. tax or certain withholding tax or reporting obligations of their partners under the international provisions of the Internal Revenue Code must complete the relevant parts of new Schedules K-2 and K-3 beginning with the 2021 tax year.

New Tax Takeaway | November 2021

THIRD TIME'S THE CHARM?

The third version of the Build Back Better Act highlights several proposed tax law changes that could affect Private Equity funds and their investors.

Tax Takeaways for Private Equity

• The latest draft aims to aid with the current SALT “cap” by increasing the limitation on an individual’s state and local tax deduction from $10,000 to $80,000 for tax years beginning after December 31, 2020
• Taxpayers earning an adjusted gross income (“AGI”) of $400,000 or more are currently eligible for 75% and 100% exclusions from the sale of qualified small business stock (“QSBS”).  The proposal reduces the exclusion to 50% for all taxpayers with an AGI in excess of $400,000 for QSBS acquired and sold within a certain period, thus potentially making Section 1202 planning opportunities less attractive
• The proposal seeks to broaden the definition of net investment income subject to the net investment income tax (“NIIT”) by including income derived in the ordinary course of a trade or business and income from the disposition of property earned outside of a passive activity and therefore imposing the NIIT on taxpayers whom historically may not have been subject to it.
• High-income individuals defined as individuals with a modified adjusted gross income (“MAGI”) exceeding $10 million would be assessed a 5% surcharge on their MAGI with additional surcharges for MAGI in excess of $25 million for tax years beginning after December 31, 2021.