Everybody knew that Trump was set to get a nice hunk of change from the passing of the Republican tax cuts for the wealthy bill. Paper-tiger Republicans like Bob Corker also knew that they would be getting a sweet payday this new year. And now hedge-fund managers begin to go old school tax sheltering in New Hampshire reports Bloomberg.
Since late 2017, hedge fund managers have created numerous shell companies in the First State, corporate America’s favorite tax jurisdiction. These limited liability companies share a common goal: dodging new tax rules for carried-interest profits through a bit of deft legal paperwork.
Big names appear to be embracing the maneuver, which requires setting up LLCs for managers entitled to share carried-interest payouts. Four LLCs have been created under the name of Elliott Management Corp., the hedge-fund giant run by Paul Singer. More than 70 have been established under the names of executives at Starwood Capital Group Management, the private-equity shop headed by Barry Sternlicht.
Of course, the tax bill was built for these kind of shenanigans. Even though Trump, through his economic advisor Gary Cohn said they were very keen on closing the carried interest loophole.
“The president remains committed to ending the carried interest deduction,” Cohn said in an interview on CNBC on Thursday. “As we continue to evolve on the framework, the president has made it clear to the tax writers and Congress. Carried interest is one of those loopholes that we talk about when we talk about getting rid of loopholes that affect wealthy Americans.”
Carried interest is the portion of a fund’s profit -- usually a 20 percent share -- that’s paid to private-equity managers, venture capitalists, hedge fund managers and certain real estate investors. Currently, tax authorities treat that income as capital gains, making it eligible for a rate as low as 20 percent. The top tax rate for ordinary income is 39.6 percent.
Then they released the tax plan in November, and lo and behold, that loophole didn’t get closed.
The House tax bill released earlier today has something for VCs (and private equity folks, and hedge fund managers) to celebrate: it doesn’t touch the carried interest tax break that both Donald Trump and Hillary Clinton vowed to do away with on the campaign trail last year.
And as the days go by and more and more LLCs spring up in New Hampshire, the results are in.
“Carried interest was a key litmus test of whether the bill can be called tax reform, and it failed,” Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center in Washington, said of the tax overhaul passed in December. “This legislation was a Swiss cheese.”
In the Republicans’ defense, they wrote a lot of words that pretended to close the loophole, so they could say they were closing this loophole—one of their big selling points.
Under pressure from industry lobbyists and exploiting a split among White House advisers, the Republican Congress in December failed to fulfill Trump’s promise to end the tax windfall enjoyed by money managers. And lawmakers may have stumbled in trying to narrow their tax advantage, writing the new carried-interest rule in a way that provides firms an easy escape.
The rule requires hedge funds and private-equity players to hold investments for at least three years to get the lower capital gains rate, rather than one year under the old law. Otherwise, they must pay the higher income tax rate.
In what Bloomberg surprisingly calls a “surprise,” the wording in the bill didn’t specify that corporations needed to follow this rule, just individuals. So, by becoming a single-member LLC, allowing yourself to be treated as an S corporation, you can be exempt from the rule.
Remember the hard-hitting Trump during the debates?
"The hedge fund guys won't like me as much as they like me right now. I know them all, but they'll pay more," Trump said during a Republican debate sponsored by CNN in September 2015. "I know people that are making a tremendous amount of money and paying virtually no tax, and I think it's unfair."
And he told CBS's "Face the Nation" in August 2015: "Half of them, look, they're energetic, they're very smart, but a lot of them, it's like they're paper pushers. They make a fortune, they pay no tax. It's ridiculous, OK? ... The hedge fund guys are getting away with murder."
Oh, well. Winning.