On Dec. 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act (Pub. L. 115-97 (Tax Act) into law. The Tax Act enacted the most sweeping changes to the Internal Revenue Code (Code) since the Tax Reform Act of 1986. One of the changes is to the taxation of carried interests. This article will discuss an overview of the provisions of the Tax Act applicable to carried interests.
Normally, the fair market value of property received in exchange for services is income, subject to the rules of Code §83. There is an exception in partnership taxation. Rev. Proc. 93-27 provides that the receipt of a future profits interest in a partnership in exchange for services is normally not income. See Rev. Proc. 93-27, 1993-2 C.B. 343; and Rev. Proc. 2001-43, 2001-2 C.B. 191. Rev. Proc. 93-27 identifies some circumstances in which the safe harbor does not apply. A service provider whom receives the profits interest is taxable on the share of the profits as earned but is not taxable on the receipt of the profits interest itself. That profits interest is called a “carried interest” (sometimes it is called a “promote”).
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