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Carried interest has allowed investment fund managers to be compensated for services with income that qualifies as long-term capital gains, which is taxed at a lower rate than ordinary income. Numerous efforts have been made over the past two decades to cut back or eliminate the favorable tax treatment of carried interests by taxing all income from carried interests as ordinary income. The 2017 Tax Cuts and Jobs Act (TCJA) enacted Internal Revenue Code Section 1061, which did not eliminate the benefit of carried interests, but rather kept the same tax treatment with a new three-year holding period requirement. Section 1061 affects many hedge funds, private equity funds, and real estate funds. While Section 1061 does not change the basic favorable treatment of carried interests, KROST professionals advise investment fund managers on the tax implications of carried interests to help structure compensation arrangements.
Read our article on "New Capital Gains Treatment for Carried Interests" to learn more about the new limits of carried interests enacted by Internal Revenue Code Section 1061.