The authors of the Senate’s proposed $1.5 trillion tax cut bill did no more than their House counterparts to close a contentious tax loophole favored by managers of private equity firms and some real estate ventures.
The Senate Finance Committee on Thursday adopted a provision similar to one included in the House’s tax plan that would extend the minimum holding period for investments that qualify for the tax break, known as the carried-interest loophole, to three years from one.
Experts said the measure would not result in major changes to the tax bills of those who already benefit from the loophole.
“Maybe it’s just symbolic to say we addressed carried interest,” said Robert Willens, a tax and accounting expert in New York. “Everyone has looked at that proposal for about a week, and it is not going to impede or change anyone’s behavior. Three years is not an unusual holding period for private equity.”
The House approved the bill containing the provision Thursday.
Both the House and Senate plans have been criticized for delivering substantial tax cuts to wealthy people and corporations at the expense of middle class taxpayers, some of whom would pay more in taxes, mostly because of the elimination of certain deductions.
The term carried interest essentially refers to profits reaped by private equity executives and hedge fund managers for the services they perform. At most private equity firms and hedge funds, the share of profits paid to managers is about 20 percent.
Such profits are now taxed at a long-term capital gains rate of about 20 percent, about half the rate at which top earners’ income would otherwise be taxed.
Critics have argued that these executives should pay the higher rate because the profits in question is effectively income.
President Trump pledged during the campaign to close the loophole, once proclaiming that because of it, “hedge fund guys are getting away with murder.”
Industry groups disagree. They argue that investment managers deserve to be taxed at the lower rate because they take entrepreneurial risks.
The impact of extending the minimum holding period for investments that qualify for the break will probably be limited, given that, according to investment data provider Preqin, the average holding period for private equity managers in a fund is currently about six years.
Mr. Willens and other experts said that the proposed change could affect some hedge fund managers who typically invest for shorter periods. But for most wealthy investment managers, he said, it would not make much difference.
“As a practical matter,” Mr. Willens said, “I don’t think it will have any impact.”