The midterm election results show that the Democrats still hold the Senate and the Republicans still hold the House. On the surface, not much has changed, and any angst on potential tax reform impacting private equity has subsided. Although there is not much change on the surface level in the House, private equity firms should continue to keep an eye out for new developments.
How Things Stand Now
Why keep an eye on something that did not change? First, the recent tax reform history, specifically regarding carried interest, does not favor investors in private equity firms. When the Tax Cuts and Jobs Act was negotiated in 2017, the taxation of carried interest was a heated negotiating point. Discussions ultimately led to a compromise that recharacterized certain net long-term capital gains as short-term ones, codified under IRC 1061. This proves that both political parties are willing to compromise on change to carried interest taxation.
Second, the Democrats have gained renewed energy with how the voting went in the 2022 elections. Going into the 2022 midterm elections, it was projected that the Republicans would gain seats in the House and possibly in the Senate. Ultimately the Democrats held firm, justifying their sense of purpose and direction for the next two years. Their direction on tax reform can be seen earlier in the year when the President and the Democratic party indicated that they still had an eye on squeezing revenue dollars out of carried interest taxation.
In the Green Book, which is the publication of the revenue proposals in the President’s budget, many revenue raisers focused on increasing rates to corporations, high-income taxpayers, and, of course, carried interest. It should be remembered that the budget proposal serves as a cornerstone of the President’s tax policies. As we head into 2023, the same 2022 revenue raisers will likely be on the negotiating table.
Looking Ahead
It is safe to assume that changes to the taxation of carried interest will be on the table for 2023 as a revenue raiser. Given that carried interest taxation has changed in the last five years, it still garners attention in budget proposals. Have you discussed tax reform’s outlook and its impact on your private equity structure with your tax advisor? If not, Calvetti Ferguson is here to help you navigate the complexities of potential tax reform and navigate the correct actions to maximize the return on your investments. If you would like more information, please fill out the contact form below.
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