Sponsors (15)
The bill trades greater tax fairness and clearer anti‑avoidance rules (and modest Social Security coverage gains) for earlier and often larger tax bills and substantially higher compliance and administrative costs for partnerships, service providers, and affected investors.
Taxpayers and the public: The bill reclassifies much investment‑management carried interest and related allocations toward ordinary income, reducing carried‑interest tax advantages and increasing tax fairness.
Service providers, small businesses, and the IRS: The bill creates clearer valuation and reporting rules (including a liquidation‑value formula and a default deemed 83(b) rule), reducing valuation disputes, surprise tax bills, and some IRS audit points.
IRS administration and compliant taxpayers: The bill clarifies reporting, valuation and anti‑avoidance rules and raises civil penalties/tightens reasonable‑cause standards, which should deter abusive tax positions and improve enforcement.
Service providers and investment partners: The bill brings earlier and higher tax bills—ordinary‑income recharacterization of carried interest, loss of certain capital‑gain/QSBS/dividend benefits, expanded self‑employment tax, and rules that can force recognition on grants, distributions, or transfers—even when interests are illiquid.
Partnerships, partners, and financial firms: The bill creates substantial new complexity—detailed look‑through/tiered partnership definitions, separate accounting under new §710, and many conforming rules—that will increase compliance costs and administrative burden.
Service providers and other recipients: Default deemed 83(b) treatment plus rules that shift the opt‑out and timing choices to recipients can create cash‑flow problems and trap recipients in unfavorable tax treatment if elections or filings are missed.
Based on analysis of 4 sections of legislative text.
Recharacterizes carried‑interest and related partnership allocations to ordinary income, changes the default Section 83(b) election for service partners, and counts certain partnership investment‑services income as self‑employment earnings.
Official title: Amend the Internal Revenue Code of 1986 to provide for the proper tax treatment of personal service income earned in pass-thru entities.
Introduced February 6, 2025 by Tammy Baldwin · Last progress February 6, 2025
Changes how partnership interests received for investment management services are taxed: it treats many carried-interest-style allocations and partnership interests as ordinary income rather than long-term capital gains, changes the default timing election for service partners, creates a new statutory special‑rule for investment‑service partnership interests, and makes certain investment‑services partnership income count as self‑employment earnings for Social Security. The rules apply to partnership interests and taxable years after enactment with some immediate and transitional provisions for dispositions and partnership years that include the enactment date.