Beginning in 2018, partners with carried interests will have to hold them for three years to be eligible for long-term capital gains; otherwise, the gains will be treated as short-term capital gain. The application of the holding period rule is not entirely clear regarding property sold by the partnership and distributions treated as capital gains. Additional interpretive guidance may clarify current uncertainty.
TECHNICAL TERMINATIONS OF PARTNERSHIPS
The TCJA permanently repeals the technical termination partnership rule and eliminates the disincentives to engage in sales or exchanges of a greater than 50 percent interest in a partnership. The repeal of this rule will allow partnerships to continue through ownership changes without resetting depreciation periods. It also removes the requirement for the partnership to establish new tax elections.
Private equity funds owning more than 10 percent of controlled foreign corporations are subject to a one-time repatriation tax on untaxed foreign earnings and profits. This provision could potentially affect portfolio companies and certain fund structures that directly or indirectly hold investments in foreign subsidiaries. The tax may be paid over eight years.
The transition tax will impact immediate and future cash flows and thereby influence the valuation of investment portfolios. Private equity and venture capital funds will face challenges in determining which of their foreign investments are considered specified foreign corporations whose earnings and profits (E&P) will be subject to deemed repatriation under the TCJA. A comprehensive E&P study may be needed to calculate what is owed.
Jim Slouber is a Managing Director in the Los Angeles office of CBIZ and MHM. He specializes in tax planning and consulting, transaction and partnership structuring, and mergers and acquisitions.
JAMES K. SLOUBER, CPA, MST MANAGING DIRECTOR, TAX CBIZ and MHM JSLOUBER@CBIZ.COM (310)268-2010