Updated:
Original:

Tax on Carried Interest Moving Closer to Reality

A new proposal to tax carried interest as ordinary income was just attached to a larger tax and spending bill that could be voted on by the House as early as tomorrow.

A new proposal to tax carried interest as ordinary income was just attached to a larger tax and spending bill that could be voted on by the House as early as tomorrow.

The bill would have a huge impact on private equity, venture capital and other private partnerships that rely on carried interest as their main source of income. The move would also impact some hedge funds that pay significant long-term capital gains. Washington has been toying with the tax increase for nearly three years, but the the current bill, sponsored by Sen. Max Baucus and Rep. Sander Levin, marks the first time the Senate and the House have come together on the issue.

Venture capital firms, real estate and energy partnerships have lobbied hard to be excluded from the tax increase, arguing that it will hurt start-ups looking to raise capital. But that effort has seemed to fail.

A summary of the bill, cited by Bloomberg, said it would allow carried interest that reflects return on invested capital to continue to be taxed at the lower capital gains rates. For other funds, “the bill would require investment fund managers to treat 75 percent of the remaining carried interest as ordinary income,” the summary said.

One only has to look at KKR’s latest S-1 filing to understand how significant the tax increase will be.

If the changes suggested by the administration or any of the proposed legislation or similar legislation were adopted, income attributable to carried interest may not meet the qualifying income requirements under the publicly traded partnership rules, and, therefore, we could either be precluded from qualifying as a partnership for U.S. federal income tax purpose or be required to hold interests in entities earning such income through a taxable U.S. corporation. If we were taxed as a corporation, our effective tax rate would increase significantly. The federal statutory rate for corporations is currently 35%. In addition, we would likely be subject to increased state and local taxes. Therefore, if any such legislation or similar legislation were to be enacted and apply to us, it would materially increase our tax liability, which could well result in a reduction in the market price of our common units.

In addition, if the proposed legislation is adopted, it could increase the amount of tax KKR's principals and other professionals would be required to pay, thereby adversely affecting KKR's ability to offer attractive incentive opportunities for key personnel.

Related

Private Equity Fuming Over Carried Interest Tax Hike

For over three years, the private equity industry’s main lobbying group successfully fought against moves to increase taxes on carried interest. Then, Max Baucus and Sander Levin had to go screw it all up yesterday by slipping carried interest legislation into a big tax and spending bill.

New Tax on Sales of PE Firms Discovered in Carried Interest Bill

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 on sales of their firms.

Family Farm Exemption Discovered in Carried Interest Tax Hike

Leveraged buyout and venture capital firms are steaming over a new carve-out provision for family farms inserted at the last minute into the carried interest tax hike that passed the House at the end of last month.

capitol3

Instead Of Closing Carried-Interest Loophole, Democrats Would Just Make It A Real Pain In The Ass

Of course, neither that plan nor the larger bill of which it is a part is going anywhere, but it’s nice to know all the same.

MadMnuchin

The Carried Interest Loophole Survives Because This Whole Tax Plan Is The Brainchild Of A Human Loophole

Steve Mnuchin is what happens when a lady falls in love with a pass-through security.