Overview
Title
To amend the Internal Revenue Code of 1986 to provide for the proper tax treatment of personal service income earned in pass-thru entities.
ELI5 AI
H. R. 1091 is a plan to make sure people who earn money by helping others invest get taxed the same way as everyone else, so they pay their fair share. It wants to stop tricks that let people pay less tax than they should.
Summary AI
H. R. 1091, also known as the "Carried Interest Fairness Act of 2025," aims to change how taxes are applied to personal service income earned through pass-thru entities, like partnerships. This bill seeks to ensure that income earned through investment management services is treated as ordinary income rather than capital gains, which may have lower tax rates. Additionally, it sets forth special rules for calculating gains or losses involved with these partnerships, and imposes penalties to prevent tax avoidance related to these changes. The act also updates rules on how self-employment income is determined for those providing investment management services.
Published
Keywords AI
Sources
Bill Statistics
Size
Language
Complexity
AnalysisAI
Overview of the Bill
The proposed legislation, titled the Carried Interest Fairness Act of 2025, aims to amend how personal service income earned within pass-through entities is treated under the U.S. tax code. The bill specifically targets the categorization and taxation of income derived by partners who provide investment management services within partnerships. The central premise is to reclassify certain income that would traditionally be taxed as capital gains into ordinary income, notably affecting how such income is taxed.
Key Issues
A major concern with this bill is its complexity. The language is highly technical, making it challenging for those without a legal or tax background to fully grasp its implications. This complexity could lead to potential misinterpretations and exploitative practices. Moreover, the recharacterization of certain incomes as ordinary income could impose a heavier tax burden on individuals who are primarily compensated through these types of earnings.
The bill also endows the Secretary of the Treasury with substantial discretion in interpreting its provisions. This latitude could result in inconsistent application and enforcement, creating an environment of uncertainty. The ambiguity around terms like "special purpose acquisition companies" and "qualified family partnerships" may foster loopholes or favor specific financial strategies, possibly giving an unjust edge to those well-versed in navigating tax codes.
Furthermore, the act's provisions do not clearly articulate the implications of amendments, leaving stakeholders unsure of potential impacts. Additionally, issues such as fair market valuation lack detail, possibly leading to variance in tax obligations across similar entities.
Broad Impact on the Public
This bill might affect anyone earning income through investment management services within partnerships, as it fundamentally changes how such income is taxed. By reclassifying income from capital gains to ordinary income, affected individuals could face higher tax liabilities. This approach may dissuade professionals from partnering in such ventures, potentially altering how investment partnerships operate.
Impact on Specific Stakeholders
Partnerships and Investors: The bill's reclassification of income could influence the attractiveness of investment roles within partnerships due to the higher tax implications. Partnerships might need to reevaluate how they incentivize partners, potentially altering compensation structures.
Investment Managers and Venture Capitalists: This group could be particularly affected, as their income may see a significant uptick in taxation, altering personal financial planning and potentially deterring individuals from engaging in partnership endeavors under the new tax structure.
Domestic C Corporations: The bill does not impose its new provisions on domestic C corporations, which might present these entities with a competitive edge compared to partnerships.
Legal and Accounting Professionals: As with any complex legislation, demand for expert guidance in compliance and strategic financial planning is likely to increase. Legal and accounting professionals may find opportunities in advising clients on navigating these changes.
Federal Government Revenue: By potentially increasing tax collections from reclassified income, the government might see an uptick in revenue, though it might also prompt lobbying efforts and legal challenges from affected sectors.
Overall, while the Carried Interest Fairness Act of 2025 seeks to standardize the taxation of certain types of income more equitably, it brings with it a host of complexities and uncertainties that will require careful navigation by individuals and entities alike.
Issues
The bill contains numerous complex and technical terms particularly in Sections 2 and 3, which may be challenging for non-experts to interpret. This complexity could lead to misinterpretation and potentially exploitative tax practices.
Section 3 introduces recharacterization of income as ordinary income for certain partnership interests, which could have significant tax implications for taxpayers and might disproportionately affect some stakeholders financially without a clear justification.
The extensive authority granted to the Secretary in Sections 2 and 3, allowing interpretations 'as otherwise provided by the Secretary' or 'to the extent provided by the Secretary,' could lead to inconsistencies in how the bill is applied or enforced, creating legal ambiguity and potential bias.
The bill lacks detailed explanations for definitions such as 'special purpose acquisition companies' and 'qualified family partnerships' in Section 3. These could create loopholes or inadvertently favor certain financial arrangements or structures over others.
Section 1 does not provide specifics or clarity on the scope or implications of the Carried Interest Fairness Act of 2025, which could lead to misinterpretation by various stakeholders.
The bill's approach to fair market valuation in Section 2 is unclear and might result in inconsistencies in how partnership interest transfers are evaluated, potentially impacting fairness and accuracy in taxation.
There is a potential for Section 710 to unfairly favor domestic C corporations over other corporate structures without clear justification, potentially leading to unintended competitive advantages.
The numerous cross-references to other sections of the Internal Revenue Code in Section 3, make the legislation cumbersome to comply with and understand, particularly affecting smaller entities with limited legal resources.
Sections
Sections are presented as they are annotated in the original legislative text. Any missing headers, numbers, or non-consecutive order is due to the original text.
1. Short title; etc Read Opens in new tab
Summary AI
Section 1 of the Act is titled the "Carried Interest Fairness Act of 2025" and explains that any changes or repeals are meant to apply to the Internal Revenue Code of 1986. The section also includes a table of contents listing the main provisions of the Act.
2. Partnership interests transferred in connection with performance of services Read Opens in new tab
Summary AI
The section modifies the rules for how partnership interests, given as payment for services, are taxed. It states that the value of the partnership interest is considered as if the partnership sold all its assets and paid off its debts, and it automatically assumes the receiver wants to include this in their income unless they opt out.
3. Special rules for partners providing investment management services to partnerships Read Opens in new tab
Summary AI
This section introduces special rules for partners in partnerships who provide investment management services, reclassifying certain income as ordinary income instead of capital gains and applying specific tax treatments to gains and losses related to these services. It also outlines rules for the disposition of partnership interests, certain distributions, and specifies exceptions and penalties for non-compliance, while offering guidance on regulations and effective dates.
710. Special rules for partners providing investment management services to partnerships Read Opens in new tab
Summary AI
In this section of the bill, it's outlined that partners who give investment management services to partnerships will have their earnings from investment services treated as regular income, rather than capital gains, which usually have lower tax rates. It also includes rules about how these income types are determined, how partnership interests are handled when sold or transferred, and specific exceptions to these rules.