It’s only a House bill

“It’s just a House bill,” one tax expert says, while a lawyer adds there is likely to be a concerted lobby effort from industries negatively affected by the Tax Cuts and Jobs Act, the Republican-drafted US tax reform proposals which were released on November 2.

At the time of going to press, private fund managers were still considering the impact of proposals to limit interest deductibility and marginally increase their personal tax rates.
One chief financial officer says its proposal to tax interest paid on loans was a big issue for the industry.

Blinn Cirella, CFO at Sawmill Capital, says the Association for Corporate Growth Private Equity Regulatory 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 used a document from economics professors’ group Build Coalition which argues that 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,” the document reads.

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

The American Investment Council also weighed into the argument, saying interest deductibility is an essential component of businesses that rely on debt financing.

“Our industry is committed to sustainable economic growth by advancing access to capital, job creation and retirement security through responsible long-term investment, and we believe tax reform requires similar long-term growth solutions. We look forward to working with the Administration and Congress in support of a tax code that encourages this view as we strengthen the entrepreneurial spirit throughout our country,” the association’s chief executive, Mike Sommers, says.

New rates?

Elsewhere, a tax advisor says 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. From that perspective they’re in the same place as before,” Michael Laverman, tax partner at EisnerAmper tells 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, 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 says.

“Its exclusion has raised some eyebrows, but it may come up later,” he says, 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.

Three days after the proposals were published, a provision to limit the amount of carried interest hedge fund managers – but not private equity managers – could tax as capital gains was introduced to appease Democrat opposition to the bill.

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,” says Laverman.