The Obama Administration has labeled their 2010 budget as A New Era of Responsibility. Part of that responsibility appears to be taxing carried interest as ordinary income.
On page 122 of the budget there is a single line item: “Tax carried interest as ordinary income,” with projections of $2,742 million in 2011, $4,347 million in 2012 and an overall $23,894 million for the ten year period.
There is no corresponding text about how the tax would be implemented, so it is premature to be thinking about how this might affect the business plan of a private investment fund.
Unlike a fixed fee, a carried interest aligns the interests of sponsors and investors with the success of the fund. Under current law, the grant of a carried interest generally is not taxable. Instead, the sponsor recognizes income and gain when allocations of partnership income and gain are made. For a partnership that generates long-term capital gains, the carried interest share of the gains would be taxed at the long-term capital gains rates (currently 15%) instead of ordinary income.
See also:
- Full Text of the the 2010 budget (.pdf)
- President Obama Proposes to Tax “Carried Interests” as Ordinary Income (.pdf) – Client Alert from Goodwin Procter
I guess we all knew this was coming. I know they call it the “hedge fund” tax, but this of course will impact us in the dirt field.
Obviously without the text there’s not much to do other than wait. But I already know people who are brainstorming about it. Unfortunately, they are (and will be) spending time working on tax strategies at the cost of deal-making.
One thing I saw this week was a buyer significantly lowering its offering price on a property to price in the anticipated tax hike.
David –
Hedge fund managers do not make a sympathetic example for not enacting this tax. The harder impact is on start ups and smaller ventures that use carried interests as incentives.
It hard to brainstorm without knowing how the change in tax code will work. it could have a big impact on how real estate joint ventures are structured.