Sponsors (3)
The bill increases tax certainty and reduces preferential treatment for investment managers—improving administration and Social Security coverage for some—while imposing higher or earlier taxes on many partners, eliminating some tax preferences, and raising compliance burdens for partnerships and small businesses.
All partners and taxpayers will have clearer, more uniform rules and reporting for complex partnership interests (including a new separate-accounting rule and Secretary guidance), improving tax administration and reducing ambiguity in partner-level calculations.
Investment managers and partners who provide services will have carried-interest gains explicitly recharacterized as ordinary income, removing a preferential capital-gains treatment and increasing tax fairness for ordinary income earners.
Partners receiving equity in exchange for services will have a clear, objective valuation rule (FMV measured by a hypothetical liquidating distribution), reducing valuation disputes between taxpayers and the IRS.
Many investment managers, partners, and service providers will face higher and earlier tax liabilities because carried interest is recharacterized as ordinary income and certain partnership items are included sooner.
Recipients of equity-for-services may owe immediate taxable income measured by a hypothetical liquidation value even when no cash is distributed, creating cash-flow strains and tax-payment burdens for small-business owners and partners.
Partnerships and partners will face increased compliance complexity, separate-accounting and recordkeeping requirements, and higher administrative costs to compute new valuations and administer elections.
Based on analysis of 4 sections of legislative text.
Reclassifies partnership interests and related allocations for investment managers as taxable/ordinary income and treats that income as self-employment earnings.
Introduced February 6, 2025 by Marie Gluesenkamp Perez · Last progress February 6, 2025
Treats partnership interests given for investment management services as taxable income when received (unless a narrowly specified deferral election is made), defines their fair market value as a hypothetical immediate liquidation, and creates new rules that reclassify gains allocated to those interests as ordinary income rather than capital gain. It also treats that recharacterized investment-services income as self-employment earnings for individuals providing specified investment management services, adds related accounting rules, and makes conforming and technical changes with effective dates generally for taxable years ending after enactment.