Carried Interest: Where Do We Go From Here?
Several months ago, I promised not to write again about carried interest taxation until relevant legislation either passed or was formally buried. Let me be the first to call me a liar (although perhaps that’s a bit harsh, as I was sincere at the time). But don’t worry: My goal this morning is not to relitigate the underlying issues. You know where I stand on those. Rather, what follows is to look at where things are at and what might happen once a bill does, indeed, pass. Where things stand: Last night, Senate and House Democrats said they would new legislation on carried interest taxation, as part of the “American Jobs and Closing Tax Loopholes Act of 2010.” Here is the relevant language, from a bill summary posted online: The bill would prevent investment fund managers from paying taxes at capital gains rates on investment management services income received as carried interest in an investment fund. To the extent that carried interest reflects a return on invested capital, the bill would continue to tax carried interest at capital gain tax rates. However, to the extent that carried interest does not reflect a return on invested capital, the bill would require investment fund managers to treat seventy-five percent (75%) of the remaining carried interest as ordinary income. A transition rule would apply prior to January 1, 2013. This proposal is currently being estimated by the Joint Committee on Taxation. So, 25% of carried interest would continue to be taxed as capital gains, while the remaining 75% would be treated as ordinary income. This would go into effect beginning 2013. The aforementioned “transition rule” for 2011 and 2012 is not spelled out, but I’ve heard that it may be a 50/50 split (i.e., 50% cap gains, 50% ordinary income). 2010 taxes would not be affected.
