Carried Interests Undergo Significant Tax Treatments

Carried interests, partnership interests held in connection with the performance of services, will undergo significant reporting and taxation treatment this year. When Section 1061 was added to the tax code as part of the Tax Cuts and Jobs Act (TCJA) of 2017, there were many questions and concerns requiring clarification. Essentially, the TCJA legislation extended the holding period for partnerships participating in certain long-term capital investments from one year to three years to qualify for favorable long-term capital gains treatment. This includes investments in securities, real estate partnerships, and trusts.

In January of 2021, regulators published the final regulations in the Federal Registry, resolving some of the concerns raised in earlier versions of the proposed regulations.

Beginning in November 2021, the IRS issued frequently asked questions to clarify compliance questions.

According to the IRS, owner taxpayers (partnership investors) and passthrough entities need to comply with these final regulations when addressing their 2021 tax compliance reporting. The following are highlights of those compliance requirements:

It seems clear that compliance requirements regarding partnership investments will be more complex this year. With so many moving parts in capital gains calculations, reach out to MHCS for advice and assistance when filing your 2021 return.