The government does not intend to allow a new “loophole” to the carried-interest provision under the Tax Cuts and Jobs Act of 2017 (P.L. 115-97). Treasury Secretary Steven Mnuchin testified on the matter at a February 14 Senate Finance Committee (SFC) hearing. The hearing was scheduled to examine the Trump administration’s fiscal year (FY) 2019 budget request.
The IRS will issue guidance within two weeks to address the potential for hedge-fund managers to avoid a provision within the new tax law designed to penalize carried-interest profits, Mnuchin testified. However, SFC ranking member Ron Wyden, D-Ore., criticized Republicans for not eliminating or sufficiently “fixing” the so-called carried interest loophole. “The passthrough loophole, which we were told again and again would be fixed, is still an ongoing problem,” Wyden said.
Under the new tax law, hedge-fund managers and other applicable investment players must now hold investments for three years to qualify for lower capital-gains tax rates on profits. The new rate is 23.8 percent (20-percent capital gains rate plus the 3.8 percent on net investment income). Previously, the law only required a one-year holding period. However, the legislative language does not technically require the longer holding period for passthrough entities such as S corporations, Wyden noted.
Loophole Unintended Error
The “talk” on Capitol Hill is the ” loophole” was an unintended drafting error on the part of Republicans. “I believe taxpayers will not be able to get that loophole,” Mnuchin responded to Wyden, adding that he had just met with the IRS on the issue that morning. Moreover, Mnuchin went on to promise lawmakers that the issue will be “resolved.” He offered no further specifics. Apparently, Mnuchin believes that a legislative fix is not necessary but that the IRS has enough leeway within existing legislative language to administratively rule to plug this hole to the new law’s “loophole closer.”
By Jessica Jeane, Wolters Kluwer News Staff
SFC Press Release: Hatch Opening Statement at Finance Hearing on Administration’s Treasury Budget Request
SFC Press Release: Wyden Statement at Finance Committee Hearing on Republican Tax Law, Treasury’s Fiscal Year 2019 Budget
Treasury Department News Release, TDNR SM-0290.