Dec 19, 2017

Private equity applauds tax bill

Illustration: Sam Jayne / Axios

Private equity's top lobbying group, The American Investment Council, is saying that it supports the federal tax bill that Congress is expected to pass on Tuesday.

Bottom line: It's a bit of a mixed bag for private equity, but the positives easily outweigh the negatives.

The positives for private equity include:

  • Lowering the corporate rate to 21%.
  • Lowering the top individual rate from 39.6% to 37%.
  • Continuing to treat carried interest as a capital gain, rather than at higher ordinary income rates (here's a primer on carried interest). The minimum hold time to qualify for this treatment was expanded from one year to three years, but that's more aimed at certain hedge fund managers, as private equity typically holds more than three years.
  • Had carried interest been touched, then some firms may have tried restructuring investment income to qualify for pass-through rates, so this saves them the trouble.

The main negative for private equity is that companies only will be allowed to deduct corporate interest on up to 30% of EBITDA for the first four years, and then 30% of EBIT afterwards. This is a change from the current 100% deductibility of interest, which could lower returns for private equity firms that rely heavily on the use of leveraged financing.

  • Expect private equity to spend the next four years trying to make sure the EBITDA link remains in place, as it is would be more beneficial to the industry.

Here is the American Investment Council's statement:

"American Investment Council commends Congress for this pro-growth, comprehensive tax bill. After decades without major reform, any tax legislation will inevitably require some trade-offs from all sectors of the business community. While the effects of the bill on private equity are mixed, we believe the final tax bill encourages business expansion and investment and will improve the environment for investing in the United States. On balance, the tax bill represents a net positive for private equity and will enable the industry to continue to make long-term investments that will grow the economy."

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