Apr 26, 2017

Trump plan would lower taxes on some hedge fund managers

AP Photo/Alex Brandon

President Trump campaigned on a pledge to increase taxes on hedge fund and private equity fund managers, by closing the carried interest loophole. But there is no mention of carried interest in the tax plan released today by the White House. Instead, there is a plan to lower the tax rate on so-called "pass through" entities, which actually would reduce the tax burden on many of those same professional investors.

What are pass-through entities? Businesses that pay taxes at individual rates (up to nearly 40%), rather than at corporate rates (35%).

New plan: The White House wants pass-through entities to be taxed at corporate rates, which it hopes to slash down to 15%.

Result: Trump's argument is that many small businesses currently are taxed as pass-through entities, but that treatment also applies to a lot of hedge funds and real estate funds that are structured as things like limited liability companies. Moreover, funds structured as limited partnerships (almost all private equity and venture capital) likely would either restructure or figure out a way to qualify as pass-through entities for tax purposes. In short, such fund managers would now pay a flat 15% tax on all of their income, including annual management fees on which they currently pay individual rates.

This would effectively eliminate the question over changing the tax treatment of carried interest, since 15% is lower than either the current capital gains rate or the ordinary income rate.

Possible caveat: Treasury Secretary Mnuchin said the following during a White House press briefing: "We will make sure that there are rules in place so that wealthy people can't create pass-throughs and use that as a mechanism to avoid paying the tax rate they should be on the personal side." He did not provide any additional specifics.

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