The 2024 election is likely to profoundly impact tax policy and legislation. Once the dust settles on the results, the incoming president and Congress will have a tall task in 2025, as the expiration of several 2017 Tax Cuts and Jobs Act (TCJA) provisions will loom large, and many other tax policy proposals will be on the table. All of the moving parts have inspired pundits to refer to 2025 as a year we will see the “Super Bowl of Tax”.
This article highlights some of the important tax provisions in play for the asset management industry and related considerations.
Key Provisions of the TCJA Set to Expire at the End of 2025
Without legislative action extending the provisions, several changes enacted under the TCJA will expire at the end of 2025, including:
- Individual tax rates will revert back to pre-2018 levels, so the highest rate will increase from 37% to 39.6% for ordinary income.
- The $10,000 limit on state and local tax (SALT) deductions will be eliminated, obviating the need, in some cases, for pass-through entity tax (PTET) elections.
- The Qualified Business Income deduction under Section 199A, which benefits partners and owners of certain pass-through businesses, will be eliminated; this would impact the choice of entity considerations for private equity and venture capital portfolio companies.
- Deductions for management fees and other portfolio expenses, currently disallowed under Section 212 for partners in “investor” funds, will once again be deductible, albeit with limitations.
- The estate tax lifetime exclusion amount will revert back to roughly $7 million, significantly less than the current exclusion amount, which is $13.6 million; there may be significant planning and gifting activity involving fund interests in 2025 if this change appears imminent.
Former President Trump has expressed support for extending the TCJA in its entirety. Vice President Harris would be in favor of extending certain provisions, such as the reduced individual tax rates, for taxpayers with less than $400,000 of taxable income. She would, however, seek to increase tax rates for both ordinary and capital gain income for taxpayers with income more than $400,000 and $1 million, respectively.
Other Relevant Provisions at Stake in 2025
Depending on the election outcome, there are other provisions that may be a part of legislative negotiations between Congress and the White House next year. Several of those provisions would impact funds, general partners, and portfolio companies. These include:
- Corporate tax rates: Vice President Harris has proposed raising the corporate tax rate from 21% to 28%, whereas former President Trump has proposed lowering it to 15%.
- Carried interests: Consistent with the Biden administration’s proposals, Harris would propose to tax certain carried interest allocations at ordinary income rates plus self-employment tax, regardless of the holding period; Trump has not proposed any changes to current law, which requires a holding period of over three years.
- Tax on unrealized gains: Harris supports the Biden administration’s proposal to impose a 25% minimum tax on taxable income, inclusive of unrealized gains, for taxpayers with a net worth of more than $100 million.
- Excess business loss limitations (Section 461(l)): Harris would propose to eliminate the favorable loss carryover rules that apply under current law.
- Limits on business interest expense under Section 163(j): These rules may be revised to be more favorable, depending on the landscape in Congress next year. There was bipartisan support in the House of Representatives for this in early 2024, but the bill stalled in the Senate. In light of higher interest rates, these limits currently have a significant impact on some hedge fund investors as well as private equity and venture capital portfolio companies.
- Bonus depreciation rules: The rules are currently being phased out and are scheduled to expire at the end of 2026. Similar to the Section 163(j) revision noted above, there was bipartisan support in the House in early 2024 to once again allow immediate expensing of certain business assets. That proposal may also resurface in 2025.
- The Inflation Reduction Act’s clean energy tax credits: The credits – some of which could be bought or sold by funds – are supported by the Biden-Harris administration but could be rolled back in a second Trump term.
The results of the congressional elections will also be a key determinant of what direction tax policy goes in during 2025.
Considerations for the Asset Management Industry
All of the variables underscore the importance of scenario planning and modeling. For example, if the sunsetting of the lower individual tax rates is expected, certain “reverse” tax planning may be in order – such as accelerating income into 2025. Private equity and venture capital funds could consider electing out of the installment sale rules to accelerate gain into 2025. And hedge funds could plan for this scenario through the careful navigation of timing issues such as the constructive sale rules.
Fund managers should be proactive about discussing potential tax changes with their advisors and having a game plan in place for different scenarios.
For more information on the above article or any business advisory services, contact Marty Williams, CPA, at (334) 887-7022 or by leaving us a message below.
Written By Joe Pacello, Andrew Byrnes, and Steve Cuneo. Copyright © 2023 BDO USA, P.C. All rights reserved. www.bdo.com
