The Obama administration released its fiscal year 2017 budget on February 9. The budget contains a number of revenue proposals of interest to private equity fund limited partners and managers, although there is little that is new:

  • Once again, there is a proposal to tax carried (profits) interests as ordinary income for partners of "investment services" partnerships, i.e., partnerships with substantially all of their assets in securities, real estate, commodities, and other investment-type assets. Although this proposal has been around for years and carried interest legislation has been introduced, it is notable that even some Republican presidential candidates have endorsed eliminating the capital gains treatment for carried interests, including the current front-runner, Donald Trump.
  • One new proposal would expand the definition of "net investment income" (income subject to an additional 3.8% tax) to include certain types of active trade or business income. This would impact managers of pass-through entities such as investment funds who actively participate in the trade or business of the entity but do not pay self-employment taxes on their share of pass-through income.
  • The budget proposes to increase the top rate of taxation on long-term capital gains and qualified dividends from 20% to 24.2%. Taking into account the 3.8% tax on investment income, this would increase the effective rate on these gains to 28%.
  • The budget would require all derivative contacts (forward contracts, swaps, options, structured notes, etc.) to be marked to market annually, with the resulting gain or loss treated as ordinary, not capital. Currently, many of these contracts are eligible for more favorable capital gains tax treatment.
  • The FY 2017 budget again includes a proposed 30% minimum flat tax for taxpayers with over $1 million of income.
  • There are various tax credit proposals in the budget, including modification and permanent extension of the 39% new markets tax credit for qualified equity investments to develop in low-income communities, expansion of the low-income housing credit, and a variety of energy-related credits.