Final Carried Interest Regulations (TD 9945)

Final Carried Interest Regulations

The IRS has issued final regulations under Code §1061, which requires an “applicable partnership interest” (API) derived from the “performance of substantial services” (i.e., “carried interest”) to be held for more than three years to be eligible for long-term capital gain treatment (i.e., v. treatment as ordinary income).

The final regs retain the structure of rules proposed in August 2020 (REG-107213-18), with certain modifications.

Specifically, changes were made to:

(1) the “capital interest exception,”

(2) the treatment of capital interests acquired with loan proceeds,

(3) the “look-through rule” for certain applicable partnership interest dispositions, and

(4) the rules addressing transfers of APIs to “Sec. 1061(d) related persons.” The final regs also clarify that an S corporation’s carried interests are also subject to the three-year holding period requirement.

The regulations generally apply to tax years beginning on or after the date they are published in the Federal Register.

However, taxpayers may choose to apply the regulations to a tax year beginning after 12/31/17, “provided the rules are consistently applied in their entirety.” (Code §1061; Carried Interests)

 

Authored by:

Dr. John Connors, J.D., CPA, LLM

Tax Educator’s Network, Inc.

[email protected]

 

For subscription information on Dr. John Connors’ educational materials, click here.

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