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Subject:  Re: Two BX questions Date:  4/20/2019  9:22 AM
Author:  EightTrack4 Number:  1751 of 1757

Second one is simpler. I believe the conversion moots any carried income tax changes for BX. That is, BX will no longer get any special treatment for carried income, and so any change to eliminate the tax treatment is irrelevant. Looking for confirmation or correction.

Take it with a grain of salt (Center for American Progress) but this is an interesting read of the carried interest taxation situation from last July:

In a weak attempt to look tough on carried interest, legislators included a small limit on the practice: The carried interest must be held for at least three years in order to qualify for capital gains treatment. However, this restriction may be meaningless. This is because many private equity managers tend to hold onto their interests for at least that long, so they will continue to enjoy the capital gains tax rate on those shares.33

Meanwhile, hedge fund managers—who tend to hold shares for shorter periods of time—have been looking for workarounds.34 For example, many managers already have created new LLCs in Delaware—a state known for its business-friendly laws—to receive managers’ carried interest payouts. They plan to have these LLCs elect to be taxed as S corporations, since an exception from the three-year rule in the law for corporations fails to specify whether it applies only to C corporations or to S corporations as well.35 Another workaround involves converting the carried interest into reinvested capital, which is also exempt from the three-year rule, or to structure the carried interest as unrestricted performance fees.36 While the Treasury Department or Congress may strike down some of these workarounds, it seems reasonable to assume that at least one of these approaches will work for individuals seeking to game the tax law.

4. Wall Street firms and wealthy families turning themselves into C corporations
If the pass-through business deduction workarounds fail, wealthy individuals from Wall Street to Fifth Avenue may be able to shelter income from taxes by setting up their affairs as a traditional C corporation.

There are a number of articles noting that the IRS has closed the S-Corporation loophole. Arguably if higher capital gains taxation is coming (PE Game of Thrones) then even APO may find it worthwhile to convert sooner rather than later.

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