Understanding The Carried Interest Tax Law

There is a long-standing tax law that has contributed significantly in a positive way to many aspects of businesses and the economy. It is known as the carried interest tax law. This law is credited with benefiting a number of industries and being a good influence on the economy by raising the level of tax revenues. It is designed to treat all partners involved in the operation of a business equally. Should the carried interest tax law be repealed, it could strangle the financing of start-up companies as well as impact many other types of business transactions.

Benefits

An effective method of compensating managers of hedge funds as well as private equity managers is found in this tax law. The carried interest tax is designed to create a return on investment for those who contribute to the fund. There are those who would like to have this tax law repealed because it permits fund managers to pay their tax at the capital gains tax rate. Some individuals in government would like them to pay the higher rate of taxation that is calculated with regular income.

How It Works

Partners in a fund receive a share of profits created by the fund. The profits received are based on the amount of money the partner has in the fund. If one partner puts in twenty percent of the fund, they receive twenty percent of the profits. A fund manager may not draw a salary for their management position. They might only get a portion of the profits that is more than the portion the manager contributed to the fund. Under this law, it’s possible for a manager to contribute twenty percent of the fund and receive thirty percent of the profits. The extra ten percent is compensation for their fund management work. This income is currently designated as carried interest and is taxed at the capital gain rate.

Economic Impact

Many people believe the carried interest tax law is a way to negate the negative effects of double taxation on corporate income. Many economic experts agree a change to the carried interest tax law could have negative effects on the economy. One industry that would be seriously harmed is the real estate industry. The partnerships in this industry could experience a tax increase of over 130 percent. This would slow down construction of buildings, homes and more. It would hurt all the other industries that depend on real estate such as building material suppliers and more. This could also cause a decrease in property tax revenues. This result would be a loss of many jobs and serious damage to the economy.

Politics

During both of his presidential campaigns, as well as in budget proposals, President Obama expressed his desire to repeal the carried interest tax law for investment managers. Senator Chuck Schumer objected to repealing this tax law. Senator Schumer’s position was that tax breaks provided by the carried interest tax law help a number of industries around the country such as real estate, oil and gas, and as well as a number of others. He felt it would be very unfair to focus so much on penalizing just investment managers.