The New Tax Act – Its Impact On Funds And Fund Managers (And Other High-Net-Worth Individuals)

On July 4th, President Trump signed into law a new tax act, representing the administration’s key tax policies.

While initial proposals for this legislation indicated it might have far more impact on funds and fund managers, many of these proposals were ultimately not included. Insofar as its impact on funds and fund managers, what was not enacted is possibly more important than what was enacted.

Among other things, the law makes permanent many of the provisions of the 2017 Tax Cuts and Jobs Act that were set to expire on December 31, 2025. This newsletter summarizes various provisions of the new law. The new law is very complicated and it will take some time to digest all of its changes. We continue to review the legislation and monitor the impact of the changes and guidance issued thereunder.

WHAT WAS NOT ENACTED

The bill does not:

(i) increase individual or corporate tax rates.

(ii) change the taxation of carried interests/incentive allocations.

(iii) include the proposed new “revenge tax” provision which was proposed to be enacted in new Section 899 and would have substantially affected investments in the U.S. by foreign investors.

(iv) impose a special tax on litigation funding.

(v) eliminate or limit the use of pass-through entity taxes (“PTETs”) to mitigate the limitation on the deductibility of state and local taxes.

(vi) increase the 1.4% excise tax on the investment income of private foundations.

WHAT WAS ENACTED

Miscellaneous itemized deductions

The new law permanently extends the disallowance of miscellaneous itemized deductions. Thus, it remains very important to be classified as a “trader” fund, as opposed to an “investor” fund.

Qualified business income deduction (Section 199A)

The 20% rate was made permanent, and Section 199A was not expanded to include BDCs (business development companies).

Controlled foreign corporations

The bill undoes the 2017 Tax Cuts and Jobs Act repeal of Section 958(b)(4), which had prohibited downward attribution from foreign persons. Bringing back Section 958(b)(4) may simplify the CFC regime and substantially decrease the number of controlled foreign corporations. However, the new law introduces a new section of the Code, Section 951B, the impact of which will need to be considered.

Endowment excise tax

The new law increases the current 1.4% tax on an endowment’s income to up to 8% for those having a student adjusted threshold in excess of $2 million. This tax is effective for taxable years beginning after December 31, 2025, so investors may try to realize gains before such time. That said, the rates as enacted are significantly lower than those previously proposed (which ranged up to 21%).

Qualified Small Business Stock (“QSBS”) exclusion

The QSBS exclusion is increased to the greater of $15 million or ten times basis, up from the greater of $10 million or ten times basis. In addition, the $50 million asset limitation is increased to $75 million, and a partial exclusion is permitted for those meeting a three- or four-year holding period as opposed to the general five-year holding period. The increased exclusion amount and the three and four year holding periods are effective for stock acquired after July 4, 2025, and the increased asset limitation also applies after that date.

Excess business loss (Section 461(l))

The excess business loss (“EBL”) rules are permanently extended and unused EBLs continue to be carried over to following years as net operating losses (as opposed to EBLs as previously proposed).

Business interest deduction (Section 163(j))

The calculation of deductions for business interest under Section 163(j) is modified to be determined before the deduction for amortization, depreciation and depletion. This change generally increases the limitation on the deductibility of business interest, for taxpayers with amortization, depreciation or depletion expense in a given tax year.

Estate, gift and generation-skipping transfer tax exemption

The estate, gift and generation-skipping transfer tax exemption is increased slightly, from $13.99 million (which was scheduled to decrease significantly as of January 1, 2026) to $15 million. The new exemption will be effective as of January 1, 2026, will be indexed to inflation thereafter and is made permanent.

State and local taxes

The state and local tax deduction cap increases to $40,000 for taxpayers with adjusted gross income up to $500,000, but phases down for adjusted gross income in excess of that amount, to $10,000. PTET tax planning remains viable under the new law and will remain very important.

Limitation on itemized deductions (Section 68)

The new law limits itemized deductions by decreasing itemized deductions by 2/37ths of such deductions, effectively meaning that itemized deductions are deductible at a 35% tax rate instead of at a 37% tax rate. Prior to the TCJA, Section 68 phased out itemized deductions by 3% of every dollar above an adjusted gross income threshold.

Other changes

Other changes in the law may affect prices of certain investments by, for example, permanently extending 100% bonus depreciation, changes to opportunity zones rules, and reductions in benefits enacted by the Biden administration for green technology.

The above changes have many nuances and not all provisions share the same effective dates. Further, this summary discusses only certain key provisions relevant to funds, their managers and high-net-worth individuals, but there are many other changes in the new law which are not discussed above.

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If you have any questions regarding the new tax law or any other tax or trust and estate issues, please contact your primary Kleinberg Kaplan attorney or one of the members of our Tax and Trusts and Estates Practices listed here.