Carried Interests Back in the Crosshairs

Senate Finance Committee ranking member Ron Wyden (D-OR) has introduced a bill that generally would require fund managers to pay taxes annually at ordinary income rates on “deemed compensation” relating to their carried interests.

Under current law, fund managers generally recognize income or gain in respect of their carried interests only when the fund sells assets that give rise to the income or gain.  If the sale occurs more than three years after the fund acquired the relevant assets, then the fund managers generally recognize long-term capital gains instead of ordinary income.  Individuals are entitled to preferential tax rates in respect of long-term capital gains.

Under Wyden’s proposal, a fund manager that does not make a capital investment in the fund and that is entitled to a 20% carried interest generally would be subject to tax annually on an amount equal to 20% of (1) the limited partners’ weighted average invested capital multiplied by (2) 9.00% plus the par yield for 5-year High Quality Market (HQM) corporate bonds at the beginning of the applicable tax year (which, in June, was 3.54%). 

Carried interests are a common topic of tax reform discussion.  However, the legislative prospects of Wyden’s bill are uncertain.

 

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