With the enactment of the Tax Cuts and Jobs Act, amendments were made to the treatment of carried interest for federal income tax purposes. Often previously referred to as the perceived ‘carried interest loophole,’ the federal changes allow long term capital gains rates to apply to carried interest if certain criteria are met. However, for some states it does not appear that these federal amendments sufficiently close the perceived ‘loophole.’ Over the past few weeks New Jersey, New York, Rhode Island and, most recently, Illinois have proposed legislation that would impose a state level tax on carried interest.
As the asset management industry continue to analyze the impact of the Act to their federal income tax liability, continued and concurrent analysis of the state impact, including significant legislative proposals such as those noted above, should be considered. State legislative proposals to tax carried interest income bring with them significant complexities surrounding potential multistate sourcing of that income as well as the potential taxation of that income by multiple states with similar proposals. We anticipate continued and additional dialogue on this topic throughout the coming year.
Partner, PwC US