Spotlight on Carried Interest and the Inflation Reduction Act of 2022

Recent agreement between Democratic Senators supports a package to raise more than $700 billion in revenue and reduce the budget deficit an estimated $300 billion over 10 years. The proposed Inflation Reduction Act of 2022 would be funded by several investments, including changes to the corporate minimum tax, IRS tax enforcement and carried interest.

Of particular interest, the carried interest proposal seeks to increase the holding period from 3 to 5 years for carried interest to be taxed as capital gains (with exclusions for real estate and those with adjusted gross income of less than $400,000).

While this proposal remains just that – a proposal – there are several opportunities you may want to consider if enacted, for example accelerating carried interest payouts before changes go into effect or timing charitable donations to minimize the tax impact of carried interest.

Modification of Rules for Carried Interest

In addition to carried interest, other proposed tax changes of note include implementing a 15% corporate minimum tax and funding the Internal Revenue Service for increased enforcement.

Notably missing are many of the original proposals surfaced in 2021, including any mention of the state and local tax (SALT) deduction. Members of the House have voiced that addressing SALT would be critical to reaching an agreement. Previously proposed changes to gift and estate taxes, capital gains and individual ordinary income tax rates are also absent from the latest proposal.

It is important to remember that this proposal will be subject to much debate in Congress before any changes are enacted. The carried interest change has been proposed by several past administrations and has received objections.

The hurdles this package has to clear seemingly indicate that there is much to be discussed and negotiated in Washington. Successful passage will require the Senate parliamentarian to review and advise on whether the provisions address taxing and spending enough to qualify for budget reconciliation. If qualified and passed in the Senate, it will then go to the House of Representatives, where support for the bill remains unclear. Additionally, the upcoming Congressional recess in August means there is a limited window of time to move the bill along.

As deliberations and negotiations unfold on Capitol Hill, we continue to advise clients to plan, but not predict, and will provide the latest insights at our Tax Policy Resource Center.