I was talking to a venture capitalist the other day and he mentioned that his tax rate had gone up dramatically for 2018. Was it due to Massachusetts property taxes no longer being deductible? No. Buried in the Trump tax bill was an end to the multi-decade “carried interest” party in which private equity, venture capital, and real estate investors have been able to pay long-term capital gains rates on money that certainly seems like ordinary income (e.g., the managers of these funds don’t put any of their own money at risk in these investments so they are just getting paid for doing their jobs, presumably).
It used to be that the holding period was one year before the manager could claim the capital gains rate. Now it is three years and Massachusetts is imposing a 10 percent tax rate of its own.
See “2017 tax reform enacts a three-year holding period rule for carried interests” (Baker Tilly, a big accounting firm) for more on this.
Could it be that Donald Trump will be remembered as the president least cozy with Wall Street?
Phil,
My best friend’s brother an attorney who’s closely connected to the Beltway dramas and has been so for thirty years. He’s not a Trump fan, but says Mr. Trump is the hardest working president in the last forty years. He states that Trump is determined to live up to his promises.
Probably not by the main stream media!
No matter what, Donald Trump is and will always be a traitor. His crime was that he dared to defeat Hillary Clinton. This cannot be forgotten or forgiven. Hillary will always be remembered as an major political figure who managed to lose to… gasp… Donald Trump–of all people.
He won in spite of the fact that the 17 intelligence agencies agreed that he should not and he could not have. He only won because the KGB spent over $50,000 to undermine our democracy (and please don’t say that was a fair street price of our political establishment.)
It does not even matter what Trump accomplishes. College students–our smartest–have made it clear: Not my president! (and not yours either!) People have asked patriots to rise and remove him from office, while others suggested he could be beheaded. This proves that Trump is a real threat to our democracy!
Why even ask what Trump will be remembered for?
My understanding is that he didn’t really get rid of carried interest for private equity, including VC. The new law requires a 3-year holding period for the favored tax treatment. Since private equity and VC firms have holding periods that typically far exceed 3 years, the new tax law doesn’t really change anything.
Dear Anonymous, you sound like you might be a pretty smart person except for your comments about our President. Are you out of your mind? Tell me you are joking by the things you say? Crooked Hillary? KGB and only $50,000 it took them to undermine or Democracy? College students these days that are not even being educated at the level they should? Really? What planet do you live on? Get over yourself already and take note on what is going on in the REAL world.
Lorraine, #5
> Are you out of your mind? Tell me you are joking
No, I was not quite joking.
I was being sarcastic, maybe just a little tiny bit; anyway… everybody is entitled to MY own opinion.
Thank you very much for your kind advice to “take note on what is going on in the REAL world”.
@philg You are 6 months late. Even the “failing” New York Times addressed this all the way back in January:
https://www.nytimes.com/2018/01/19/business/dealbook/private-equity-tax-overhaul.html
«The private equity industry, especially the bigger firms that like to use lots of leverage to goose their equity returns, cannot be happy about these changes to the tax code». They even observe that «What is especially surprising about the changes is that they happened at all considering the many pictures of private equity executives cozying up to Mr. Trump in the past year or so.».
@toucan sam: you saved yourself with the “probably”.
Referenced anecdotal data aside It looks like the changes in the tax bill are estimated to raise around $1.1 billion over 10 years versus around $16 billion that the carried interest loophole costs over the same period per the JCT. That seems like an insignificant change – I don’t know if that qualifies him as least cozy with Wall Street. If it does, that’s sad.
https://www.bloomberg.com/news/articles/2017-12-22/cohn-mnuchin-split-helped-break-trump-s-carried-interest-pledge
There’s also a loophole which is allowing investors to side step this rule by paying out to a corporation instead of a person (it does look like there is work to try to close that).
https://www.businessinsider.com/trump-gop-tax-law-carried-interest-hedge-fund-loophole-2018-2
Francisco, Barlo: Thanks. I recognize that I’m late to the party, but I think it might be because 99+% of the media coverage characterized the tax law changes as an unqualified giveaway to the rich. So it didn’t occur to me that private equity and VC partners would get the short end of any stick!
Hi philg,
I enjoyed meeting you at OSH, and I’ve been late catching up on RSS.
I’d be surprised that most VCs would find (as mentioned previously by Anonymous) a three-year holding period requirement to be a big problem unless they invest in fairly late-stage companies. It seems that such a requirement will most likely hurt hedge fund managers that manage smaller onshore funds with high portfolio turnover.
As I understand it (and I’m certainly no tax lawyer/advisor), the JOBS Act QSBS exemptions still apply after the Trump tax reform, so an investor in Qualified Small Business Stock that holds their position for >5yrs generally has 100% of the gain up to $10MM excluded from taxation. I haven’t read anything that would preclude gains on carried interest in the form of QSBS, so presumably for a typical angel/mid-stage VC that holds a portfolio of QSBS investments >5yrs, the first $10MM of *each* QSBS investment for *each* investor will be exempt from LTCG tax.
What surprises me most is that so few angels, VCs, incubators/accelerators and founders who stand to benefit from the JOBS Act exclusion even know of its existence. Even many professional advisors, some of whom claim to be “venture lawyers,” often seem to be wholly uninformed.
Based on what I’ve learned (which is not enough) about the 2017 tax bill, the bigger problem for small VCs might be the elimination of the ability of individual LPs to deduct fund management fees on their tax returns. Your old 2 and 20 may now effectively look more like 3.5-4 and 20. Tears will be shed for the fund managers who must settle for a mere seven windows on their Gulfstream.
Cheers,
Tony