Sponsors (15)
This is not an official government website.
Copyright © 2026 PLEJ LC. All rights reserved.
Recharacterizes gains and tax treatment for partnership interests received in return for investment management services so that amounts that would normally be treated as capital gain are instead taxed as ordinary income, and requires those amounts to be included in self-employment income. It also adds detailed definitions, anti-abuse rules, valuation and reporting requirements, tougher accuracy-related penalties, and gives Treasury broad regulatory authority. Most changes apply to partnership interests and tax years after enactment with some provisions effective immediately or for dispositions after enactment.
This bill tightens tax treatment of investment‑service partnership income—raising taxes and payroll liabilities for many investment managers and imposing significant compliance costs—while aiming to improve valuation clarity, enforcement tools, and Social Security coverage for service providers.
Investment managers and partners providing investment services will generally have carried interest treated as ordinary income rather than preferential capital gains, reducing a tax-preference advantage and making taxation of service income more consistent with wages.
Partners who provide investment management services will have that partnership income included as self-employment earnings, expanding Social Security coverage and increasing future benefit credits for those workers.
The bill authorizes Treasury rulemaking and clarifies valuation, reporting, and accounting (including separate partner accounting under new IRC §710), which improves administrability, enforcement clarity, and reduces some ambiguity for taxpayers and the IRS.
Partners and investment managers will generally pay higher federal income taxes because carried interest and many partnership amounts are recharacterized as ordinary income instead of capital gains, substantially increasing tax liability for affected individuals and firms.
Valuing service-based partnership interests at their hypothetical liquidation value and applying a default inclusion election can create immediate taxable income on illiquid interests, producing cash-flow problems and higher short-term tax bills for recipients (especially at early-stage firms).
The bill substantially increases compliance, reporting, valuation, and recordkeeping burdens for partnerships and service-providing partners, raising administrative costs—particularly for smaller firms without in-house tax resources.
Introduced February 6, 2025 by Tammy Baldwin · Last progress February 6, 2025