CBIZ : IRS Releases Final Regulations on Carried Interests

The IRS released final regulations on Jan. 7, 2021 under Section 1061 regarding the treatment of certain gains related to carried interests. Treatment of carried interest has long been considered a loophole for private equity (PE) and venture capital (VC) firms because the tax provision treats interest as capital gains rather than income resulting in a significantly lower tax rate. Proponents of the status quo argue that taxing carried interest at a lower rate helps to incentivize strategic management of investments and is also a just reward for the risks taken and energies expended when managing portfolio companies.

Tax reform law commonly known as the Tax Cuts and Jobs Act (TCJA) attempted to curb carried interest benefits by requiring a longer holding period for investments before they become eligible for capital gains tax treatment, proliferating an environment of ambitious workarounds. The IRS subsequently released proposed rules in the summer of 2020 to further clarify the tax treatment and address concerns with the intentionality of the current statute and address concerns with the intentionality of the current statute.

Our team is reviewing the final regulations and will provide you with more insight in the coming weeks. We will continue to monitor for updates and further clarifications around the carried interest rules. For more information about how the final regulations would affect your organization, please contact us.

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