Tagcarried interest

What Is Carried Interest?

map background.

By:  Amanda Wilson

During the second presidential debate, one of the few things that both candidates agreed on was doing away with carried interest as part of their proposed tax changes.  But they never explained what it is.  So what was is carried interest?

Normally, when an employee does work for his employer, the employee includes his compensation in his taxable income at ordinary income rates.  In the partnership area, though, a manager or other person that provides services to the partnership can agree that part of its compensation will be a share of profits.  For example, after the partners receive a specified return of their investment, the manager will receive 20% of any profits over that threshold.  This 20% would be a carried interest.

In the partnership tax world, the receipt of a carried interest is not generally taxable.  Instead, it is only when the partnership actually recognizes and allocates the 20% of profits that the carried interest is taxable to the manager.  Moreover, if the partnership is generating capital gains (common in the real estate area, for example), the carried interest can  qualify for capital gain treatment.

Carried interest has been an easy tax target of politicians for a long time, so it is not surprising to see it targeted by the presidential candidates this time.

Carried Interests OK Under Management Fee Waiver Regulations

By:  Amanda Wilson

Last week, I was at the ABA Tax Section meeting in Chicago.  During one of the partnership panels, Clifford Warren, Special Counsel to the Associate Chief Counsel (Passthroughs and Special Industries) at the IRS, was posed several questions about the new management fee waiver proposed regulations.  Mr. Warren agreed with the panelists that carried interests are fine under the proposed regulations, at least with respect to investment funds.  This is good news, although the good news may not last long as President Obama and many politicians (including a few presidential candidates) call for doing away with the preferential tax treatment for carried interests.

It should be noted that Mr. Warren’s comments had the standard disclaimer for IRS officials speaking on panels, which was that he was speaking in his individual capacity and not for the IRS.



Obama Renews Carried Interest Fight

Capitol buildingBy:  Amanda Wilson

As my prior blog posts have discussed (see most recent here), we are seeing repeated efforts to disallow favorable tax treatment of carried interests in partnership.  Earlier this week, President Obama once again called for Congress to shut down carried interest treatment.   Donald Trump has also called to close the so-called carried interest loophole, and on Wednesday Jeb Bush also did so.  We can expect this to be a hot issue in the upcoming months.


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