The IRS has issued final regulations that provide guidance related to “carried interests” in a partnership. The final regulations amend existing regulations on holding periods to clarify the holding period of a partner’s interest in a partnership that includes in whole or in part an applicable partnership interest and/or a profits interest. Accordingly, the regulations affect taxpayers who directly or indirectly hold applicable partnership interests in partnerships and the passthrough entities through which the applicable partnership interest is held.
The Tax Cuts and Jobs Act enacted the partnership interest rules and clarifies the tax treatment of income from a carried interest given in exchange for asset management services, such as services for private equity funds, venture capital funds, and hedge funds. Investment funds are usually partnerships with the fund manager as the general partner and the investors as limited partners. The fund manager itself is generally a partnership whose members have investment management expertise. The fund manager receives management fees and a carried interest.
Income from the carried interest, which tends to be in the range of 20 to 25 percent of profits, passes through from the fund manager partnership to its member partners whose professional skill generates capital income for the fund’s investors. The capital gain income is recognized by the underlying investment fund as it sells off investment assets. Under the rules, the holding period increased for long-term capital gains from “carried interest” in investment partnerships. Capital gain passed through to fund managers via a partnership profits interest (carried interest) in exchange for investment management services must meet an extended three-year holding period to qualify for long-term capital gain treatment.
Please call the Crosslin tax team at 615-320-5500 to review the impact of this guidance on transfers as a partner or partnership with an applicable partnership interest to determine the impact on your taxable income.