Carried Interests (Promote Interests) Under Attack, Again

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Over the past many years, we have been monitoring legislative initiatives aimed at taxing Carried Interests at ordinary tax rates, and once again, Washington is ramping up its efforts.  On February 14th, Representative Sander Levin outlined a new proposal to increase the tax rate on income earned from Carried Interests.  Additionally, as we discussed in our previous Nienow & Tierney, LLP News blog post here, President Obama’s 2013 Budget Proposal includes the same change.  The President also forwarded the same general proposal in September of last year, as we detailed here.

Carried interests can loosely be defined as interests in partnerships and funds held by the investment organizer based on their efforts to put the venture together. These arrangements are often referred to as “promote interests” as well.  The Internal Revenue Code contains provisions that tax “carried interests” at the more favorable capital gain tax rates. 

In an effort to target large investment funds that utilize this provision, tax proposals, including these latest ones, aim to treat the income from the eventual success of the venture as compensation for services, taxed at ordinary tax rates.  The result is a potential tax rate increase of approximately 30% on such income.

It is estimated that the change would generate $13.5 billion in additional taxes over the next decade.  Levin, who is the top Democrat on the Ways and Means Committee recently stated “this loophole for years has unfairly enabled some of the highest-paid individuals in the country to sharply reduce their tax bills and it is time to close it once and for all”.  In the past, there has been no distinction between the multi-billion investment funds of Wall Street, and the friends and family real estate investment partnership of Main Street.

House Republicans have objected to the potential change saying it would hurt economic growth.

Because this change would impact our clients, we will continue to monitor these legislative developments, and will post updates on the Nienow & Tierney, LLP News blog.

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