The tax treatment of carried interest has been eyed as a revenue source off and on for the past few years. It’s back in the sights of the administration in the new American Jobs Act.
Subtitle B – Tax Carried Interest in Investment Partnerships as Ordinary Income
Section 411 – Partnership Interests Transferred in Connection With Performance of Services.
Current law allows service partners to receive capital gains treatment on labor income without limit, which creates an unfair and inefficient tax preference. This section would tax as ordinary income, and make subject to self-employment tax, a service partner’s share of the income of an investment partnership attributable to a carried interest because such income is derived from the performance of services.
Section 412 – Special Rules for Partners Providing Investment Management Services to Partnerships.
To the extent that a service partner contributes “invested capital” and the partnership reasonably allocates its income and loss between such invested capital and the remaining interest, income attributable to the invested capital would not be recharacterized. This subtitle would be effective for taxable years beginning after December 31, 2012.
Full text of the American Jobs Act on WSJ.com