Manchin-Schumer Bill Would Reshape Carried Interest for Private Equity
The proposed Inflation Reduction Act of 2022 would lengthen the carried-interest holding period from three to five years, tighten Section 1061 timing rules, and add a 15% corporate AMT, materially affecting PE sponsors and their funds.
The July 27, 2022 Inflation Reduction Act introduced by Senators Manchin and Schumer would, if enacted, mark the most significant change to the private equity tax landscape since the 2017 Tax Cuts and Jobs Act. The bill lengthens the requisite holding period for carried interest to qualify for long-term capital gain treatment from more than three years to more than five years, with limited exceptions for taxpayers earning under $400,000 of adjusted gross income and for real property trades or businesses (which would face a separate three-year requirement). It also restarts the clock based on when the sponsor substantially acquires the carried interest or the partnership substantially acquires its assets, diverging from current Section 1061 asset-level holding period principles and disrupting common disposal techniques. A corporate alternative minimum tax of 15% would apply to certain corporations. Sophisticated sponsors, LPs, and their counsel should model fund-level economics, review waterfall and distribution mechanics, and track Senate floor action and any conference changes before year end.