Riverside mulls US tax reform impact on payroll

The immediate impact of US tax reform is being felt in the payroll department of at least one private fund manager, where there is uncertainty over how much people should be taxed at the end of the month.

“The Internal Revenue Service hasn’t issued tax tables yet, so there is confusion over how much people should be taxed, and what the exemption numbers are,” Pam Hendrickson, chief operating officer at the Riverside Company, told pfm.

Under the reform, which is now effective, income tax rates have been revised, with the top individual rate reduced to 37 percent from 39.6 percent. Rates for the other six brackets have also been reduced.

Beyond the immediate impact, Riverside is still digesting the reform which favours private equity by reducing the corporate tax rate and maintaining the capital gains status of carried interest under certain conditions, but reduces firms’ ability to deduct interest payments from their tax bills.

“Much of the press coverage suggests there was no change to carried interest capital gains. In fact, the hold period to have access to carried interest capital gains triples under the new law”
Pam Hendrickson

“We are working closely with our accounting firm to find out what we should be asking; there is so much confusion,” Hendrickson said, adding that the revisions to the conditions under which carried interest can be taxed as capital gains have the potential to be particularly complicated.

“Much of the press coverage suggests there was no change to carried interest capital gains. In fact, the hold period to have access to carried interest capital gains triples under the new law.”

There should be a reward for long-term investment, Hendrickson said, suggesting complicated calculations would be needed to establish tax rates when it comes to add-on investments. They would also be dependent on where you are in the investment cycle.

“It’s disturbing that carried interest is easy to rally round as a political issue, under the law it’s a capital gain, but the reform has changed the conditions,” she said.

However, Hendrickson said it was too early to tell whether the overall impact of the reform would positive or negative.