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IRS Says S Corps Subject to Carried Interest Restrictions (1)

July 31, 2020, 3:19 PMUpdated: July 31, 2020, 3:50 PM

IRS rules that would restrict the ability of private equity and hedge fund managers to lock in a lower tax rate for some of their pay maintain a narrow reading of an exception for corporations.

The tax law increased to three years the amount of time that an investment must be held for the fund managers to get the preferential rate. Known as carried interest, it lets fund managers have much of their income taxed at 23.8% rather than at the top tax rate of 37%.

  • Lawmakers exempted corporations from the longer holding period. Some saw that term as an opening for funds to convert to S corporations and avoid the three-year requirement. An S corporation is a form of pass-through entity tax at the individual owner level.
  • IRS proposed rules (REG-107213-18; RIN 1545-BO81) published Friday follow a 2018 notice clarifying that S corporations aren’t eligible for the exemption. The agency said any timely comments received on the earlier notice “will be considered as part of the Treasury decision adopting these proposed regulations as final regulations.”
(Updates with additional information starting in first sentence.)

To contact the reporters on this story: Lydia O'Neal in Washington at loneal@bloombergtax.com; Allyson Versprille in Washington at aversprille@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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