The government is taking action to close a loophole that remained intact after the Carried Interest Tax Break was retained under the new tax law, according to Treasury Secretary Steven Mnuchin.
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The carried interest tax break, which President Donald Trump openly opposed during his campaign, was retained after Trump's overhaul of the tax system — save a minor adjustment. In order to qualify for lower capital gains tax rates, fund managers must now hold onto their investment for one to three years, the Wall Street Journal reports.
Reportedly, hedge fund managers have discovered another way to achieve lower rates despite this amendment to the rule. In December, the number of LLCs incorporated in Delaware rose by 19% after hedge fund managers flocked to the state in order to set up single-member LLCs, which qualify as pass-through entities.
By doing so, profits that would normally be subject to the new three-year holding period are exempt from the rule and subject to a lower tax rate of around 20% rather than the individual rate of 37%, Bloomberg reports.
Mnuchin has since announced that the government received authorization on Feb. 14 to close this loophole and prevent hedge fund managers from continuing to skirt taxes owed. The issue could be resolved within the next two weeks, according to the WSJ.
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