IRS Plans to Issue Regulations Clarifying Limitations on Carried Interest

The Internal Revenue Service announced that S corporations are subject to the extended three year holding period for applicable partnership interests and that regulations will be issued soon.

Carried interests are ownership interests in a partnership that share in the partnership’s net profits. Carried interests often are issued to investment managers in connection with the investment manager’s services. These interests often result in the holder receiving capital gains which are taxed at a lower rate, rather than ordinary income.

The Tax Cuts and Jobs Act extended the holding period with respect to certain carried interests (i.e. applicable partnership interests) to three years. The IRS today issued Notice 2018-18 which states that it will be issuing regulations clarifying that taxpayers will not be able to circumvent the three-year rule by using “S corporations.”

Under the tax reform law, the three-year rule took effect for tax years beginning after Dec. 31, 2017. Treasury and IRS intend to issue regulations that are also effective for tax years beginning after that date.

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