The Internal Revenue Service (IRS) on November 3 issued guidance regarding how taxpayers, including pass-through entities, should report carried interests. Issued in the form of frequently asked questions, the guidance requires entities to attach a worksheet to a carried interest holder’s K-1 for tax returns filed after December 31, 2021, for which the issuing entity applies final carried interest tax regulations. The taxpayer holding the carried interest then must attach additional worksheets to his or her tax return.
A pass-through entity or taxpayer declining to apply the final carried interest regulations to tax returns filed after December 31, 2021, for a taxable year beginning before January 19, 2021, may furnish the required information in a similar form to the prescribed worksheets.
While the Tax Cuts and Jobs Act enacted in 2017 generally applied a three-year holding period to carried interest to qualify for long-term capital gains tax treatment, the Act exempted so-called 1231 gains from the longer period. Such gains continue to qualify for long-term capital gains tax treatment if held at least one year.
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