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Carried Interest Fairness Act of 2025
3/7/2025, 4:23 AM
Summary of Bill HR 1091
The bill seeks to ensure that personal service income earned in pass-thru entities is taxed appropriately. This is important because there has been concern that some high-income individuals are using pass-thru entities to avoid paying higher tax rates on their personal service income.
Under the proposed legislation, personal service income earned in pass-thru entities would be subject to the same tax rates as if it were earned directly by the individual. This would help prevent individuals from using pass-thru entities as a tax avoidance strategy. Overall, the Pass-Thru Entity Tax Treatment Act aims to promote fairness in the tax system by ensuring that all income, including personal service income earned in pass-thru entities, is taxed appropriately. It is important to note that this bill is still in the early stages of the legislative process and may undergo changes before potentially becoming law.
Congressional Summary of HR 1091
Carried Interest Fairness Act of 2025
This bill taxes income from carried interest at ordinary income tax rates and makes other changes related to carried interest. (Some exceptions apply.)
As background, a general partner in a private equity firm or hedge fund (typically structured as a partnership) generally receives a share of the profits from the assets managed by the general partner (known as carried interest). Under current law, carried interest is characterized (for federal tax purposes) as an interest in a partnership’s capital and, thus, taxed at capital gains tax rates (which may be lower than the applicable ordinary income tax rates).
Under the bill, net capital gain and loss attributable to carried interest is recharacterized as ordinary income and loss and, thus, taxed at ordinary income tax rates. (Some exceptions apply.)
The bill also treats as ordinary the money (or fair market value of property) received by a partner in a sale or exchange of carried interest. (Thus, the bill extends what is known as the hot asset rule to include carried interest.)
Further, the bill deems distributions of carried interest by a partnership in exchange for interest in other partnership property a sale or exchange of such property and, thus, requires the partner to recognize ordinary gain on the distributed carried interest.
Finally, the bill imposes self-employment taxes on carried interest income.
