Private equity firms picking through the proposed tax hike on carried interest have discovered an alarming provision buried in the legislation that will raise taxes when they sell their firms.
The provision means any founder of a hedge fund, PE firm or venture capital firm who sells shares in the firm, even through an IPO, will be taxed at ordinary income rates as high as 39 percent. Right now, those sales are taxes at capital gains rates of 15 percent. This would obviously hit anyone trying to cash out by selling to another firm or going public.
Not surprisingly, the PE industry is steaming over this provision and are working to kill it before it gets voted on either today or tomorrow. Lawmakers say the provision was put in to stop fund managers from trying to get around the new carried interest tax.
The sales provision is intended to stop executives at buyout, venture-capital and real-estate partnerships from circumventing the higher taxes on their pay imposed by the bill, said Matthew Beck, a spokesman for the House Ways and Means Committee. Otherwise, he said, fund managers would sell their stake -- and pay the lower tax rate -- just before receiving income subject to higher taxes.