Private fund managers still digesting US tax reform

The House bill includes a proposal to limit interest deductibility, and measures that will increase personal taxes paid by fund managers.

One working day after the US tax reform bill was published, private fund managers are still considering the implications of proposals to limit interest deductibility and marginally increase private fund managers’ personal tax rates.

One chief financial officer said she had not finished reading the 430-page document, the Tax Cuts and Jobs Act, which was released on Thursday, but its proposal to tax interest paid on loans was a big issue for the industry.

Blinn Cirella, CFO at Sawmill Capital, said the Association for Corporate Growth Private Equity Task Force – which establishes industry standards and discusses policy issues with both the industry and regulators – met with congressional staff in September to discuss the reforms.

The PERT said a proposal to allow for 100 percent expensing – so firms can deduct the cost of capital expenses immediately instead of spreading them over several years – is not an alternative to interest deductibility.

“The loss of interest deductibility would make borrowing more expensive for the majority of businesses, both large and small, that rely on credit to fund new investments or meet operating costs; not all credit is used to purchase assets,” PERT said in a document.

One hundred percent expensing, which made it into the House bill, is a “short-term fix with limited benefit to the economy,” the document added.

New rates?

Elsewhere, a tax advisor said he has fielded calls from private fund clients asking whether they will be able to benefit from a newly introduced 25 percent tax rate for pass-through entities.

“The pass-through provision excludes service providers, including fund managers, law firms and accountants, so they will still be taxed at the income tax level which, at the highest end, remains at 39.6 percent. So from that perspective they’re in the same place as before,” Michael Laverman, tax partner at EisnerAmper told sister publication pfm.

But because the bill also calls for a removal of the distinction between S-corps and limited liability companies, private fund managers will now be subject to an additional 2.9 percent self-employment tax, something from which they were previously exempt.

The absence of a proposal to tax carried interest as income, instead of at the lower capital gains level, was notable, Laverman said.

“Its exclusion has raised some eyebrows, but it may come up later,” he said, echoing the sentiment at the recent Private Equity International Private Funds Finance and Compliance Forum in San Francisco that it could become a bargaining chip.

Doubt the bill will pass in its current form is widespread. Under Senate rules, some legislation can pass with only 51 votes if it does not increase the deficit, but given the tax cuts this bill is unlikely to fulfil that criteria. It would therefore need 60 votes, and significant Democratic support which it does not have.

“We are reminding people it’s just the House bill, we’ve still got the Senate version to come and it’s likely to be heavily negotiated,” Laverman told pfm.