Treasury plans to close S Corp loophole in TCJA carried interest provision

By Mark S. Nelson, J.D. The Treasury Department and the Internal Revenue Service issued a notice stating their intent to adopt a regulation that will close a loophole created by the Tax Cuts and Jobs Act (TCJA) (Pub. L. No. 115-97) under which some firms could have set up Subchapter S corporations to avoid the lengthened holding period for long-term capital gains under the TCJA’s carried interest provision. According to Notice 2018-18, Treasury and the IRS expect the regulation be effective for taxable years beginning after December 31, 2017. TCJA Section 13309 followed both the House and Senate versions of tax reform and lengthened the holding period for favorable capital gains treatment from 1 year to 3 years regarding partnership profits interests held in connection with the performance of investment services. The holding period arises in the context of carried interest, which often impacts hedge funds and private equity funds. But confusion resulted when the TCJA…

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