Federal Tax Policy: The Possible Impact on Private Equity Firms

With president-elect Donald Trump returning to the White House, the new administration's suggested tax policies could bring continuation — and even expansion — of provisions within the Tax Cuts and Jobs Act of 2017 (TCJA). Here's a look at the key tax policies that could affect private equity (PE) firms.

Carried interest taxation

Under the new administration, the carried interest tax treatment could remain unchanged, allowing it to continue being taxed at the lower capital gains rate. This means PE firm partners could still benefit from the favorable tax treatment on carried interest earnings, maintaining a lower overall tax burden compared to ordinary income rates. Though this and some other plans may not occur if Trump faces Congressional pressure to offset TCJA extenders with revenues.

Capital gains and qualified dividend taxes

Maintaining the current long-term capital gains tax rate of 20% for high-income earners is also likely. This stability in capital gains taxation could provide a consistent tax environment for PE firms and their investors, encouraging continued investment in long-term projects.

Corporate tax rate

Trump has suggested reducing the corporate tax rate further from 21% to 20% or even 15% for domestic production. This reduction could lower the tax burden on PE firms' portfolio companies, potentially increasing after-tax profits and enhancing investment returns.

However, for taxpayers who import goods, suggested favors tariffs to offset some income tax revenue. Trump has called for tariffs of 10% to 20% on all imported goods. In addition, Trump has routinely said he would implement a tariff of 60% on imports from China and, occasionally, has remarked that a higher tariff rate is possible.

Individual taxation rates

Trump's proposed tax policies include extending the tax cuts from the 2017 Tax Cuts and Jobs Act. This includes maintaining the lower individual tax rates, which could benefit high-income earners, including those in the private equity sector.

Estate and gift taxes

The new administration may maintain the current estate tax exemption thresholds and rates, which could benefit succession planning for PE firm owners.

How CLA can help with federal tax planning for private equity

Regardless of whether federal taxes remain low or increase, private equity firms and their owners can still benefit from strategic tax planning. CLA tax professionals can help you with proactive planning and scenario modeling to help you stay ahead of the curve of any tax policy changes.