IRS Carried Interest Regulations: Significant Tax Challenges and Planning Opportunities

IRC 1061 increases the holding period required for long-term capital gains treatment from more than one year to more than three years. The impact of the three-year holding period could be burdensome to private equity, and real estate professionals.

There is controversy over carried interest because the tax rules allow private equity and real estate professionals to pay taxes on carried interest at the capital gains tax rate instead of the higher tax rate applicable to ordinary income. IRC 1061 increases the required long-term capital gains holding period for an "applicable partnership interest" to more than three years. Advisers must identify interests subject to IRC 1061 for tax planning purposes.

The IRS and the Treasury, on January 7, 2021, issued final regulations applicable to Section 1061 with significant changes for recharacterizing certain capital gain in connection with profits interests. The final rules included revisions to (1) the capital interest gains and losses and exceptions, (2) gains on the sale of API and distributed API property, and (3) transfers to related parties. The final regulations eliminate the transition rule that previously allowed a partnership to elect not to consider all long-term capital gains and losses recognized from the disposition of all assets held by the partnership for purposes of the recharacterization calculation. Tax counsel and advisers must identify critical issues stemming from these regulations and plan accordingly.

President Trump has stated, leading up to the 2025 tax reform discussions, that he wants to close the “carried interest loophole,” which suggests that it is possible that further restrictions may be imposed.

Listen as our panel discusses the requirements of IRC 1061, determining API subject to the new holding requirements, key planning issues for 1231 properties, and tax planning techniques to maintain favorable tax treatment of carried interest.

1. Overview of the requirements for obtaining capital gains treatment under IRC 1061
2. Impact of IRS final regulations
3. Determining API and "applicable trade or business"
4. Applicability of IRC 1061 to 1231 property
5. Planning ideas for avoiding IRC 1061 three-year holding period
6. Best practices for compensation arrangements in light of new holding requirements under IRC 1061

The panel will review these and other noteworthy issues:

• Treatment of carried interest and performance of services under IRC 1061
• Understanding critical provisions of the IRS final regulations
• Available tax planning techniques and strategies for partnerships for more favorable tax treatment
• Determining partnership interest that is API subject to IRC Section 1061 holding requirements
• Understanding key planning issues regarding the applicability of IRC 1061 to 1231 and 1256 property
• Potential planning opportunities presented by special allocations, transfers to unrelated parties, capital contributions, distributions, and lending transactions
• Best practices in ensuring favorable tax treatment in compensation arrangements involving carried interest

Learning Objectives

After completing this course, you will be able to:

• Understand the treatment of carried interest and performance of services under IRC 1061
• Understand critical provisions of the IRS final regulations
• Ascertain available tax planning techniques and strategies for partnerships for more favorable tax treatment
• Recognize partnership interest that is API subject to IRC Section 1061 holding requirements
• Understand key planning issues regarding the applicability of IRC 1061 to 1231 property
• Ascertain planning opportunities presented by special allocations, transfers to unrelated parties, capital contributions, and distributions

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business, legal or public firm experience at mid-level within the organization, involved in sophisticated tax planning and reporting; supervisory authority over other attorneys/preparers/accountants. Knowledge and understanding of partnership and other pass-through entities, IRC 1061, 1231; familiarity with tax planning for hedge funds, private equity, and real estate professionals.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).