Sponsors (3)
The bill clarifies and tightens taxation and reporting of partnership service‑income—closing carried‑interest preferences and reducing uncertainty—but does so at the cost of higher near‑term tax bills for many partners and substantially greater valuation and compliance burdens, especially for those holding illiquid interests.
Partnerships, partners, and financial institutions get clearer, uniform rules (valuation by liquidation FMV, new reporting/section rules, and opt-out procedures) that reduce tax uncertainty and IRS disputes.
Investment managers and other service partners who earned carried interest will generally be taxed at ordinary-income rates rather than preferential capital-gain rates, reducing a tax preference and increasing tax fairness/revenue.
Individuals providing investment management services will have that income clearly classified as self-employment income, making them eligible to earn Social Security credits from those earnings.
Many partners—particularly in startups, small partnerships, and funds—may face substantially higher current tax bills because income is recognized at a liquidation-based fair market value and carried interest/gains are often recharacterized as ordinary income, reducing cash available for operations or growth.
The bill imposes significant new compliance, valuation, recordkeeping, and reporting burdens on partnerships, partners, tax preparers, financial institutions, and the IRS, raising ongoing accounting and administrative costs.
Recipients who receive illiquid partnership interests can be taxed on a liquidating FMV even though they lack liquidity to pay the tax, potentially causing cash-flow hardship or forcing asset disposition.
Based on analysis of 4 sections of legislative text.
Reclassifies carried-interest-style allocations: treats partnership interests for investment services as taxable property, turns related capital gains into ordinary income, and makes that income subject to self-employment tax.
Introduced February 6, 2025 by Marie Gluesenkamp Perez · Last progress February 6, 2025
Treats partnership interests given for investment management services as taxable property and reclassifies gains that flow to investment-service partners. Allocations of capital gains tied to an “investment services partnership interest” are converted to ordinary income (and losses to ordinary losses subject to limits), and that income is treated as self-employment earnings for Social Security/Medicare purposes. The bill also creates a new Internal Revenue Code section setting rules for valuation, elections, allocation mechanics, dividend and capital-gain exceptions, and phased-in effective dates with transition rules for partnership years that straddle enactment. Many conforming edits are made across Subchapter K and Subchapter O to reflect the new treatment.