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Examining the impact of Section 461 the alternative asset management industry

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February 2019


Like everyone else in the United States, asset managers (and the hedge or private equity funds they sponsor) are still coming to grips with tax reform and the impact to their business. New rules addressing carried interest, a 20% deduction for certain pass-through vehicles, and comprehensive changes to cross-border transactions will all play a significant role in the industry for years to come.

In addition to these headline reform items, another new tax provision has flown under the radar for many managers but can equally impact their tax returns. Section 11012 of the 2017 tax reform act (the Act) amends Internal Revenue Service Section 461 (Section 461) to limit the deductibility of business losses incurred by noncorporate taxpayers. These modifications to Section 461 are set to expire at the end of 2025, as is the case with most non-corporate reform provisions including individual tax rate cuts.

The impact of the amendments to Section 461 uniquely affects the alternative asset management industry as managers work through the limitations to excess business losses through 2025. This Insight will address some of the most pressing issues affecting the industry, as well as items that need further guidance.

The takeaway

Like many aspects of the Act, the total impact of EBL rules to the asset management industry is still unknown while taxpayers await further guidance. Asset managers should review and assess the potential application to their investors as well as general partners. In particular, advisers need to decide how the rules should best be applied to capital losses. Some managers may take steps to restructure their compensation packages to mitigate the impact of these new rules. In most situations it will be the individuals and their accountants (as opposed to the fund manager) that will be responsible for tracking the impact of EBLs, and communication among these parties will be key.

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Brian Rebhun

Asset Management Tax Leader, PwC US

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