PRESIDENT JOE BIDEN’S TAX REFORMS PROPOSAL AND IMPACT ON PRIVATE EQUITY FUNDS
In January of 2021, the U.S began a new era with the inauguration of the Biden-Harris administration. As Joe Biden mentioned during the campaign, it is inevitable that revised tax legislation will be introduced in 2021. Although no detailed tax proposals have been released to date, it is likely that some of the key proposals of the tax changes could be:
- An increase in the tax rate: Specifically, an increase of the higher individual income tax rate from 37% to 39.6% for those with income over USD 400,000 per year.
- Individuals earning $400,000 or more would pay additional payroll taxes.
- The estate tax exemption would drop by about 50%.
Capital gains and investment income:
- Capital Gains Tax: Long-term capital gains and qualified dividends will be at the ordinary income tax rate for individuals with an income above $1 million.
- Carried interest, which is currently taxed as capital gains, will be taxed at ordinary rates. The effective tax rate will almost double (20% to 39.6%), which will impact PE funds.
Business Tax Proposals:
- An increase of the federal corporate tax rate from 21% to 28%;
- A new corporate alternative minimum tax with annual book profits of $100 million or more, at a rate equal to 15% of the corporation’s book income.
These proposals have not been formalized, but if implemented will create additional tax burdens on Private Equity Funds (PEF) and on partners earning carried interest operating in the United States.