Democrats see end of deferred interest tax break in sight
“href =” https://www.law360.com/tax-authority/articles/1384836/# “> Alan K. Ota ·
The drive of Congressional Democrats to secure one of their long-standing priorities, repealing the deferred interest tax break, has progressed on Capitol Hill as lawmakers draft legislation to move parts of the plan forward. recovery plan from President Joe Biden.
Federal Hall in New York’s financial district. Democrats and some Republicans have criticized the preferential tax treatment of interest earned, the portion of profits paid to limited partners of investment funds in exchange for management services. (AP Photo / Mary Altaffer)
Key Democrats said the administration and party leaders were trying to work out the details of a plan that would require partners in various types of investment funds to pay regular income tax rates rather than rates. long-term capital gains on the profits of their investment services participation, or interest-bearing, in these funds.
They said a proposal to end the interest-bearing incentive could be part of a tax package to fund democratic priorities in tandem with a separate Biden proposal. This proposal would tax the capital gains of taxpayers who earn at least $ 1 million at an individual maximum rate of 39.6% instead of the current maximum capital gains rate of 20%.
Democratic supporters have said ending the interest-bearing tax break for managers of private equity, venture capital and hedge funds was a key part of their party’s plan to raise taxes. wealthy investors for help finance Biden’s stimulus package, which includes a infrastructure plan and family incentives. They argued that interest earned by the general partner of an investment fund should be taxed at individual rates, not at reduced rates for capital gains, like the tax treatment of other types of compensation, including bonuses and most stock options.
In the House, Rep. Bill Pascrell, DN.J., a prominent member of the Ways and Means Committee, said he would push for inclusion from his Equity of Interest Bill, HR 1068, into legislation to advance Biden’s recovery plan. The bill would require that income from an investment in an investment services company be treated as ordinary income, subject to individual rates and self-employment tax, and codify an exception for earned earnings. on the eligible capital investment of a partner.
Pascrell’s plan would also exempt certain family partnerships and double the usual 20% tax underpayment penalty under the Internal Revenue Code to 40%. Section 6662 in the event of non-payment of ordinary tax rates on deferred interest.
“It’s a matter of who gets the breaks and who doesn’t get the breaks,” Pascrell told Law360.
Pascrell argued The interest-bearing tax incentive is not necessary for investment fund general partners, but also said he would be willing to fine-tune his plan to reshape part of the partnership tax framework established in 1954. Internal Revenue Law.
House Ways and Means Committee Chairman Richard Neal, D-Mass., Said he plans to review the deferral interest tax relief as part of a comprehensive review of proposed rate changes. taxation of individuals. This includes Biden’s plan to increase the highest individual rate at 39.6% and tax capital gains on those who earn at least $ 1 million as ordinary income.
“I guess that interest will be in the foreground at some point,” Neal told Law360.
Such legislation should be discussed in the context of a reconciliation invoice or any other legislation to promote family incentives, including an extension temporary expanded child tax credit promulgated in the American Rescue Plan Act , and not as part of a new tax package for a five-year surface transport re-authorization on regular order.
Some business advocates have championed preferential rates for deferred interest, arguing that investment fund general partners deserve to be taxed at reduced capital gains rates on the applicable partnership interest they receive in exchange for management services. Typically, fund general partners receive a 2% commission and a 20% share of the profits, while the limited partners receive 80% of the profits.
“As workers and local economies continue to struggle during this pandemic, Washington should not punish long-term investments that create jobs, build businesses in communities, and develop more renewable energy across America.” said Drew Maloney, president and CEO of the American Investment Council, said in a written statement. The group represents private equity and growth capital companies.
In the Senate, Senator Elizabeth Warren, D-Mass., A member of the Finance Committee, said a plan to end the interest-bearing tax incentive was part of a two-pronged campaign to increase the levies on wealthy taxpayers to fund the incentives. for working families and other priorities.
“There are two ways to go forward. One is to try to sew up the current code, which I am all for. And that is what it is about. change the focus. The other is to tax wealth at all levels. taxes, “Warren told Law360.
In addition to pushing for an end to the tax incentive for interest earned, it has used his new seat on the tax writing board for promote a plan, S. 510, to levy an annual wealth tax on families and trusts with a net worth of at least $ 50 million.
While Democrats have been divided over a wealth tax and Biden’s proposal for a 28% corporate rate, Senator Tammy Baldwin, D-Wisconsin, said she believes there will be strong support among centrists and liberals in the Democratic caucus to end the deferred interest tax incentive. Her end proposal the incentive, S. 1598, is similar to Pascrell’s Bill and has 13 co-sponsors, including a key centrist, Sen. Joe Manchin, DW.Va., and three members of the Finance Committee: Warren and Sens . Sherrod Brown, D -Ohio and Sheldon Whitehouse, DR.I.
“It’s the lowest fruit,” Baldwin told Law360.
Baldwin predicted his bill would enjoy broad Democratic support in part because even some Republicans, including President Donald Trump, have criticized the deferred interest tax relief in recent years.
After promising to end the tax incentive for interest carried during the 2016 presidential campaign, Trump backed a provision in the 2017 Tax Cuts and Jobs Act. The provision required investment managers to hold their interest in funds for at least three years – instead of one year – in order to qualify for long-term appreciation rates under the Internal. Revenue Code. Chapter 1061 .
Some supporters have said the legislation could help clarify questions about the treatment of certain types of deferred interest after the Internal Revenue Service settlement completion in January to implement the changes to the 2017 law.
On the other hand, Republicans have argued that taxing interest on ordinary individual rates would hurt investment firms and reduce the prospects for the formation of new investment funds.
Rep. Kevin Brady, R-Texas, a senior member of the Ways and Means Committee, said Republicans have declared the three-year mandatory holding period for deferred interest to qualify for capital gains rates long-term represented “the golden mean” as part of the 2017 tax law. It had “reinforced that these are long-term investments that have a very positive impact on the economy,” according to Brady.
Brady expressed concern that removing the incentive would reduce the ability of investment funds to attract investors and provide capital to help businesses grow and counter the effects of the pandemic. coronavirus.
Finance Committee member Senator Bill Cassidy, R-La., Said Republicans will try to defend the interest-bearing tax incentive as a key factor in the success of private equity funds and other types of Investment Funds.
“This essentially allows for the efficient deployment of capital,” Cassidy told Law360.
According to a press release from Baldwin, the Congressional Joint Committee on Taxation projected that a plan to end the deferred interest tax incentive would raise $ 15 billion over 10 years as a stand-alone measure . But the Tax Foundation, a conservative think tank, projected that a similar plan would generate less revenue – about $ 7.4 billion over 10 years – if passed as part of the U.S. plan for Biden’s families. , as it would apply primarily to investment fund partners who earn less than $ 1. million.
Indeed, the group’s analysis concluded that investment fund partners with higher income would be covered by Biden’s separate proposal to tax all capital gains, including interest carried, from all taxpayers. earning at least $ 1 million at a maximum individual rate of 39.6%.
Sen. Ben Cardin, D-Md., A senior member of the finance committee, said Democrats could come up with a plan to end the incentive to interest general investment fund partners, with or no final action on Biden’s plan to raise capital gains taxes. for wealthy investors. But Cardin said lawmakers should address concerns about the proposal’s impact on some investment fund managers, who rely on interest earned for their livelihoods instead of wages and fees.
“The problem has always been to draft a law on the interest carried,” Cardin told Law360. For example, he said there could be disputes over potential exceptions to allow reduced capital gains tax rates to apply to certain types of deferred interest.
“You have to determine who actually benefits from a tax provision, as opposed to those who are just investors,” Cardin said.
– Edited by Robert Rudinger and Neil Cohen.
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