S.445 - Carried Interest Fairness Act of 2025 (119th Congress)
Summary
The Carried Interest Fairness Act of 2025 aims to modify the tax treatment of income earned through partnership interests, particularly those related to investment management services. It seeks to recharacterize certain capital gains as ordinary income and impose stricter rules on partnership interests transferred in connection with the performance of services. The bill also includes provisions to prevent the avoidance of these new regulations and imposes penalties for underpayments related to investment management services.
Expected Effects
If enacted, this act would likely increase the tax burden on investment managers and those receiving carried interest. It would also change how partnership interests are valued and taxed upon transfer. This could lead to changes in investment strategies and potentially impact the attractiveness of certain investment structures.
Potential Benefits
- Increased tax revenue from recharacterizing capital gains as ordinary income.
- Reduced tax loopholes related to carried interest.
- Greater fairness in the tax system by taxing investment managers' income at ordinary income rates.
- Discourages tax avoidance strategies related to partnership interests.
- May lead to more investment in long-term projects rather than short-term gains.
Most Benefited Areas:
Potential Disadvantages
- Potential reduction in investment in certain sectors due to increased tax burden.
- Increased complexity in tax compliance for partnerships and investment managers.
- Possible negative impact on the competitiveness of the U.S. investment industry.
- May incentivize investment managers to seek alternative compensation structures.
- Could lead to litigation and disputes over the interpretation of the new regulations.
Most Disadvantaged Areas:
Constitutional Alignment
The bill primarily deals with taxation, which falls under the purview of Congress as granted by Article I, Section 8, Clause 1 of the Constitution (the power to lay and collect taxes). The Sixteenth Amendment allows Congress to tax income, "from whatever source derived," which supports the bill's aim to tax carried interest as ordinary income. However, arguments could arise regarding the fairness and equity of the tax treatment, potentially leading to legal challenges under the Equal Protection Clause of the Fourteenth Amendment.
Impact Assessment: Things You Care About ⓘ
This action has been evaluated across 19 key areas that matter to you. Scores range from 1 (highly disadvantageous) to 5 (highly beneficial).