The U.S. Department of Treasury and the Internal Revenue Service issued guidance seeking to close a loophole that hedge-fund managers had been trying to exploit to avoid paying higher taxes on carried-interest profits.
The guidance informs taxpayers that regulations will be issued barring money managers from using S corporations to take advantage of an exemption to new rules for carried interest contained in President Donald Trump’s tax legislation, according to a statement Thursday.
Secretary Steven Mnuchin told a Senate panel on Feb. 14 that a Bloomberg News story, which detailed how hedge funds created scores of shell companies to work around the new carried-profit rules, prompted him to instruct administration officials to issue guidance on the subject within two weeks.
Read more on how hedge funds planned to dodge new tax rules
The new guidance could put an end to hedge fund managers’ plans to create numerous shell companies in Delaware -- corporate America’s favorite tax jurisdiction -- to get around the tax law’s requirement that assets must be held for three years instead of one year to qualify for a lower tax rate.
Carried interest is the portion of an investment fund’s returns that are paid to hedge fund and private-equity managers, venture capitalists and certain real estate investors. For federal tax purposes, it’s eligible for a tax rate of 23.8 percent -- which includes a 3.8 percent tax on investment income imposed by the Affordable Care Act -- on sales of assets held for at least three years. Otherwise, managers face a top federal income tax rate of 37 percent.
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