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If I have carried interest in an S corporation, can I avoid the three-year holding period?

Mar 26, 2018

Effective for tax years beginning after December 31, 2017, the TCJA imposes a three-year holding period requirement (instead of the former one-year holding period) for “applicable partnership interests” received in connection with the performance of services in “an applicable trade or business” to be taxed as long-term capital gain. These interests are often referred to as “carried interests” or “sweat equity.” The new statute stated that an applicable partnership interest does not include any interest in a partnership directly or indirectly held by a corporation. Smart tax planners immediately thought, “Why not hold the carried interest in an S corporation?” The taxpayer would still benefit from pass-through taxation and could achieve capital gain treatment after holding the interest for just one year. The same day this planning idea made front-page news, Treasury Secretary Mnuchin announced that the IRS will issue regulations that prevent this S corporation workaround by providing that a corporation for this purpose does not include an S corporation.


Crystal Christenson, CPA, MST
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