The 2025 Federal Budget: What Tax Changes Might Impact Private Equity
President Biden has released his 2025 budget and supporting tax revenue proposals, commonly known as the Green Book.
While the Green Book serves as a conceptual starting point for discussions with Congress, it provides insight into Democratic tax policy. These proposals are subject to legislative approval (which may be unlikely in the Republican controlled House) and may evolve during the legislative process.
A few of the more significant proposals applicable to private equity include:
Corporate income tax rate increase
- Biden proposes raising the corporate income tax rate from 21% to 28%. If enacted, this would significantly impact taxable corporate transactions and the overall cost of doing business in corporate form. It could also affect tax attributes tied to the corporate rate, such as net operating losses.
- Proposal effective for taxable years beginning after December 31, 2023.
Individual income tax rate increase
- Biden proposes to raise the top marginal individual income tax rate from 37% to 39.6%.
- Proposal effective for taxable years beginning after December 31, 2023.
Capital gain and qualified dividend income rate
- For wealthy taxpayers, Biden proposes to tax capital gain and qualified dividend income at ordinary income tax rates (39.6% plus the net investment income tax rate of 5%)
- Applicable taxpayers are those with taxable income exceeding $1 million for married filing jointly or $500,000 for single/married filing separately taxpayers, respectively.
- Proposal effective for income recognized on or after date of enactment.
Carried interest taxation
- Proposed recharacterization of long-term capital gain from “carried interests” to ordinary income when such income is derived from an “investment services partnership interest.”
- An investment services partnership interest is an investment partnership held by a person who provides partnership services. A partnership qualifies as an investment partnership if:
- Substantially all assets are investment type assets (securities, real estate, interest in partnerships, etc.), and
- Over half of the partnership’s contributed capital is from partners holding the interest as an investment rather than in connection with a trade or business.
- An investment services partnership interest is an investment partnership held by a person who provides partnership services. A partnership qualifies as an investment partnership if:
- Proposal effective for taxable years beginning after December 31, 2024.
1031 exchanges
- Biden proposes to effectively repeal the ability to defer gain in excess of $500,000 for each taxpayer ($1 million with respect to married taxpayers filing a joint return) per year connected to a real property exchange. Any gain above such thresholds would be recognized as taxable gain in the year of transfer.
- Proposal effective for exchanges completed in taxable years beginning after December 31, 2024
Net investment income tax
- Biden proposes to expand the net investment income tax (NIIT) base so all pass-through business income of wealthy taxpayers is subject to either the NIIT or the Self-employment Contributions Act. As a result, additional income for married filing jointly taxpayers making above $400,000 ($200,000 for married taxpayers filing separately or single taxpayers) would be subject to NIIT.
- In addition, Biden proposes increasing the NIIT rate and the additional Medicare tax rate by 1.2 percentage points for taxpayers with more than $400,000 of earnings, which would bring the total tax rate from 3.8% to 5%.
- Proposal effective for taxable years beginning after December 31, 2023.
How we can help
While all of this is only proposed and may never become law, it’s good to be aware of possible tax changes, especially if you’re interested in benefitting from tax planning strategies. More likely on the horizon is the sunsetting in 2026 of many beneficial Tax Cuts and Jobs Act provisions. Explore some of the upcoming changes and learn steps you should consider now to reduce your tax impact.
Craig Arends is a principal at CLA and is the managing principal of CLA's private equity practice. Craig brings a concentration of experience in providing accounting and transaction structuring advice for leveraged recapitalizations, purchase accounting and SEC reporting, assessing quality of earnings, and GAAP accounting. He has far-reaching experience with critiquing financial models and reviewing target companies' financial performance to identify cost reductions and/or operating efficiencies Craig has more than 30 years of experience in public accounting serving public companies, private equity groups, and companies, including a term as principal in charge of a Big Four Capital Markets Group in Moscow, Russia. He has led financial accounting due diligence projects for private equity investor groups and venture capital funds, primarily in the technology, communications, and manufacturing industries, as well as assisting with Foreign Corrupt Practice Act matters ranging from investigation of payments made, validation of compliance with corporate policies, and review of proposed transactions to ensure compliance. When not working, Craig enjoys watching any sports, but his most favorite are baseball, football and soccer.
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