As we’ve seen, hastily and sloppily thrown together overhauls of one of the most complicated pieces of federal legislation, specifically, the tax code, can have unintended consequences. Sure, the thing is a boon for the extremely rich. But it is not an unmitigated boon. One bitter pill that some rich people, notably hedge fund managers, have had to swallow is a belated payment on a decade’s worth of earnings. Another is that living in the more habitable parts of the country is now somewhat more expensive, on account of the Red State Republicans the hedge fund guys helped put in power really sticking it to the Blue State hippies and slashing their local tax deductions, which were also really helpful to the hedge-fund set in Greenwich, Short Hills and Mamaroneck. And now we find out that, as the IRS seeks to make sense out of 1,000 pages of gobbledygook that no one bothered to read before passing into law, it’s even worse than we imagined.
Buried in 439 pages of proposed regulations released by the Internal Revenue Service last month was an unfortunate surprise for investors in so-called trader hedge funds like Point72, which trade stocks or other assets frequently: Their tax bills might increase as a result of the deduction limit.
“The rules create the worst possible situation,” said David Miller, a tax lawyer at Proskauer Rose LLP.
Those funds can now only deduct a certain amount of the interest they pay on that borrowed money (previously they could deduct it in full). Any remaining interest costs get passed to fund investors.
Investors can only deduct those interest costs along with any of the fund’s investment interest expenses on their 2019 tax returns if the fund has had relatively strong performance and generated enough interest income against which to take the deductions.
With hedge funds overall down 3.62 percent this year through November, many funds won’t meet that hurdle -- and wind up saddling investors with a “double whammy” of non-deductible fund expenses, said Simcha David, a tax partner at accounting and advisory firm EisnerAmper, which works with investment funds.
The horror! Steve, Gary: Couldn’t you just put a new tax on food stamps or check-cashing? You’re killin’ us. This could not possibly get worse, except if you hadn’t just engaged in the biggest transfer of wealth in the wrong direction in human history. Whaaaa, it can?
Under the new tax law, companies can deduct interest costs up to 30 percent of earnings before interest, tax, depreciation and amortization, or Ebitda, until 2022. After that, the cap narrows to 30 percent of earnings before interest and taxes, or EBIT -- since that number includes depreciation and amortization, it’s lower, making the potential deduction amount even smaller.