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S Corporations Subject to Three-Year Hold Period

S Corporations Subject to Three-Year Hold Period

On March 1, 2018, the Treasury Department (TD) released Notice 2018-18, giving notice on its intentions on issuing regulations that will address the taxation of carried interest for “corporations.” Carried interest is an investment managers share of profits that they receive as a form of compensation for running a fund. The tax treatment in pass-through entities is in the form of an incentive allocation where the manager gets a reallocation of all tax attributes from their investors (generally 20%, but this amount varies by manager).

Gains held for one year and one day get long-term capital gain treatment. The Tax Cuts and Jobs Act (TCJA), passed on December 22, 2017, has changed the holding period requirements for the eligibility of long-term capital gains treatment on carried interest from more than one year to more than three years except for “corporations.”

Notice 2018-18 states the intentions of the TD to specifically exclude “S Corporations” as being  “corporations” under the new statute enacted by TCJA by providing regulations. This is a deviation from the past as the term “corporations” has always meant both “S Corporations” and “C Corporations.”  The expected impact that TD is seeking with the new regulations to be issued is that “S Corporations” (which allow for pass-thru treatment of income) will be subject to the over three-year holding period limitation for claiming long-term capital gain treatment on any carried interest gains. The regulations that address the definition of “corporation,” for the purposes of the newly passed carried interest provisions, would be effective for tax years beginning after December 31, 2017.

It is interesting to note that statutes dictate law and regulations are explanations to the statutes. In this case, the TD may not be able to enforce the regulations because the statute doesn’t exclude “S Corporations.” We will follow up on this matter when we get clarity in the regulations.

If you have any questions, please contact your Withum tax advisor or fill out the form below and we’ll reach out to you.

Author: Robert S. Schachter, CPA | rschachter@withum.com

 

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