Managers who are able to combine their management fees and their carried interest would be able to maximize their savings. “It behooves funds to explore this,” Spiro said.
Still, Spiro and others warn the IRS could issue regulations curbing the pass-through workaround, and any associated carried interest breaks. The agency could say that carried interest can’t be included when calculating the pass-through entity tax, or that carried interest isn’t a deductible business expense.
‘Appetite for Risk’
Not all funds will be able to take advantage of the pass-through tax. Single-member LLCs aren’t considered pass-throughs, so for managers who keep their carried interest profits in such a vehicle, the workaround is off limits.
Those managers could add a member, such as a spouse, or switch to become an S corporation to obtain the carried interest benefit of the new tax, according to a June 12 note from Kleinberg Kaplan.
Mitev cautioned such moves are “for people who have greater appetite for risk.” Still, if they get slapped with a 20 percent IRS penalty for underpayment, “they could have a good argument that they’re just following state law,” he said.
Managers who work in Connecticut but live in New York are likely to be shut out of the full savings from the pass-through entity tax.
While the fund would pay the mandatory Connecticut levy, and the New York resident would be eligible to take it as a federal deduction, he wouldn’t get a corresponding credit on his New York state income tax return, according to Mitev.
“If you’re a New York resident, you are hosed in a way,” Mitev said.
This article was provided by Bloomberg News.