It’s been more than a year since the Republican-led Congress passed the Tax Cuts and Jobs Act (TCJA), the most significant piece of tax legislation in several decades. But there are still holes in the law, which became clear this tax season in the absence of guidance, according to E. George Teixeira, partner in Anchin’s financial services practice. In this article, we talked to Teixeira about the impact of the TCJA and why he believes it’s vital for tax and accounting professionals to attend this year’s Private Investment Funds Tax & Accounting Master Class.
The 2018 tax season may have been the most difficult in recent memory because of the numerous changes under the TCJA, which Congress rushed into law in December 2017.
But even when CPAs tried to explain the changes to their clients, most Americans didn’t realize the impact of the new law until they filed their tax returns. While rates did come down, many taxpayers have complained they aren’t seeing the refunds or the large increases they thought they would have under the new law.
“You could have spent the year before having all the forms, trying to explain the changes to your clients, but until you go to file their returns, that’s when they pay attention unfortunately. Some of these changes really affected my client base in the hedge fund and private equity world,” says Teixeira, chair of FRA’s The 10th Annual Private Investment Funds Tax & Accounting Master Class, May 20-21, in New York City.
For example, Teixeira says the new law enacted the excess business loss rule and caps the loss people can take on trades or businesses at $250,000 for those who file as a single or $500,000 for those who file jointly. This had a huge impact on hedge fund managers who previously could claim the entire loss.
“Previously if I had a hedge fund manager who is funding his management company to pay rent, salary and bonuses, and he runs the company at a loss, let’s say a $10 million loss, he could take the $10 million loss. Now the new rule says he can only take $500,000 of that in the current year and the other $9.5 million becomes a NOL in the future year and you can take 80 percent of it going forward as a NOL,” says Teixeira.
The new rule came as a surprise to some clients even though they should have been aware of it. Teixeira says it’s almost like a stealth tax because it caps the amount of losses they can take. For hedge fund managers who have capital gains, interest, dividends, and their funds are investor funds, it means they must pay full dollar on the gains that they receive through their funds and are limited on their losses from their management companies.
And those who manage investor funds can no longer deduct their management fee, their biggest expense, because it is part of the portfolio miscellaneous 2 percent deductions that were eliminated under the new tax plan through the year 2025, according to Teixeira.
Another change that had an impact on the hedge fund/private equity world is the new business interest limitation, which caps net business interest expenses at business interest income plus 30 percent of adjusted taxable income. The calculation formula is convoluted, he says, noting that even those who thought they understood the regulation found it was not as clear when they read the instructions for Form 8990. However, Teixeira says that the formula and how it calculates interest captured the hedge fund world surprisingly well.
But the industry is still waiting on guidance for carried interest. The new tax law created a three-year holding period requirement for recipients of carried interests to qualify for preferential tax rates on long-term capital gain. There is still a question on how the law applies to S corporations and what ramifications there may be for taxed and untaxed carried interest earned prior to the law’s implementation. Guidance is expected any day now, he says, and will be a topic of interest during The 10th Annual Private Investment Funds Tax & Accounting Master Class.
Teixeira says he’s looking forward to hearing Lee Sheppard’s keynote address on the real-life impacts of the TCJA. Sheppard, contributing editor of Tax Analysts, is one of the most widely read and respected tax commentators in the world. Her presentation will include how to effectively restructure funds while waiting for guidance, tax considerations of investing or restructuring using “blockers,” how to apply guidelines retroactively, and lessons learned from the tax filing season.
The conference agenda also includes presentations and panel discussions on
- private equity deal structures
- pass-through deductions with Section 199A
- implications of 163(j) within effective tax planning
- new partnership audit rules and preparation of partnership tax return
- updates on state and local taxes
- tax planning for management companies and compensating employees
- international tax implications: CFCs, GILTI, FDII
- decoding the latest guidance on qualified opportunity zones (QOZ)
- guidance and clarity on valuation
- tax planning considerations for investment structures
“I’ve been speaking and attending this conference for years, and this one is more important than any of the others I’ve attended because the tax law is a little more than a year old. When it came out we were still filing under the old law. This year is the first time we are dealing with the new tax law,” he says. “People will come away with a better understanding of the topic than they did before.”
For more information on The 10th Annual Private Investment Funds Tax & Accounting Master Class or to register, click here.