Putting the Squeeze on Carried Interests

Maryland's House and Senate introduced identical bills in January that would apply an additional 17% state income tax to carried interest and management fee income (i) attributable to investment management services rendered in Maryland or (ii) earned by Maryland residents in Maryland or elsewhere, with exceptions for certain real estate businesses. 

California, Connecticut, the District of Columbia, Illinois, Massachusetts, New Jersey, New York, and Rhode Island have previously proposed additional taxes on carried interest. However, of these states, only New Jersey has enacted its proposal, and New Jersey's carried interest legislation does not take effect unless and until New York, Connecticut, and Massachusetts adopt similar legislation. In light of the recent economic slowdown precipitated by the COVID-19 pandemic, it is unclear whether any of these states will have much immediate incentive to act on their proposals.

By contrast, if Maryland enacts its proposal as currently drafted, its effective date would not depend on other states' adoption of similar legislation.

Meanwhile, the IRS is expected to soon release proposed regulations under section 1061 that would address the treatment of carried interests under the Tax Cuts and Jobs Act, which generally imposes a 3-year holding period as a precondition to treating gain in respect of carried interests as long-term capital gain. 

 

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