Carried interest is top of mind as states introduce carried interest legislation and as President Trump’s proposed tax plan causes uncertainty for the carried interest allocation.
Recently, the legislatures of Connecticut, Massachusetts, and New Jersey released draft bills that alter their approach to taxing carried interest. These bills are similar to the legislation introduced last year by the New York State General Assembly, which sought to add a 19 percent surtax that would increase the effective tax rate on carried interest to match the highest federal personal income tax. The effective date of the New York, Connecticut, Massachusetts, and New Jersey carried interest legislation is dependent on the mutual implementation of such reform by each of these states.
Similar carried interest reform bills have been introduced in both chambers of the Illinois legislature, calling for a 20 percent privilege tax on “partnerships and S corporations engaged in the business of conducting investment management services.” The enactment of the Illinois legislation is also dependent on passage of similar legislation by Connecticut, New Jersey, and New York.
Trump Tax Plan:
The current Trump tax plan proposes a 15 percent federal tax on passthrough income; however, there is no proposed change in the capital gains rates. This creates a cloud of uncertainty around the future taxation of carried interest at the federal level.
To date, there is no indication that any of these bills will pass their respective state’s legislature. In fact, some Governors recommend waiting for President Trump’s federal tax reform before implementing a new regime to tax carried at the state level. Then states would have a better understanding of their options to generate revenue through taxation.
Arthur Bell will continue to monitor these and other state level developments affecting the alternative investment industry. If you have any particular questions regarding how these proposed legislation may affect your fund manager’s bottom line, please contact your Arthur Bell advisor at 855-787-0001 or via email at email@example.com.