Updates on Regulation, Trading, and Market Reforms for the Alternative Investment Community

Taxation of Carried Interests is Reignited by Recent Congressional Bill

Representatives Bill Pascrell (D-NJ), Andy Levin (D-MI) and Katie Porter (D-CA) released H.R. 1068[1] on February 16, 2021, known as the “Carried Interest Fairness Act” (the “Act”).  The Carried Interest Fairness Act would tax carried interest compensation at ordinary income tax rates and treating it as wage income subject to employment taxes.  Capital gains taxation would still apply to general partners and managers who invest capital in their funds.  All other income received that is disproportionate to the general partner’s or manager’s investment would be taxed at ordinary rates.

According to a 2018 analysis of similar legislation by the non-partisan Congressional Budget Office, the Act, if adopted, would generate more than $14 billion in revenue over ten years; some experts believe it would generate more than ten times as much to the Treasury.[2]

By way of background, the carried interest is the general partner or investment adviser’s share of partnership income that is compensation for the expertise provided including fundraising, asset management and investment decisions rather than a return on capital investment.  Because of the compensation component, law makers have long struggled with the taxation mismatched that compensation is not taxed as ordinary income rates as traditional employment compensation is so taxed.

The most recent legislation affecting the taxation of the carried interest occurred as part of the Tax Cuts and Job Act of 2017 (“TCJA”).  The TCJA required that general partners and investment managers hold their applicable investments for three years instead of one to receive long-term capital gains treatment on their carried interest.   The Act would likely abolish the protections afforded to carried interest taxation in the TCJA.

Financial markets experts predict that the Act has an insignificant chance of passing as significant sums of money will be spent to fight it.

[1] The legislation is cosponsored by Reps. Don Beyer (D-VA-08), Tom Suozzi (D-NY-03), Earl Blumenauer (D-OR-03), and Judy Chu (D-CA-27).
[2] https://pascrell.house.gov/news/documentsingle.aspx?DocumentID=4610

About the author

Debbie represents private investment funds and investment advisers in connection with fund structuring, advertising, private placement procedures, compliance policies and procedures, side letters, placement contracts, related agreements and issues. Debbie’s experience includes private equity funds, venture capital funds complex partnership reorganizations, domestic and offshore hedge funds, Opportunity Zone Funds, real estate investment funds and trusts, EB-5 funds, and large master-feeder structures.  Debbie has extensive experience with private securities offerings and financial products, including through crowdfunding, domestic and international joint ventures, global equity offerings, where she represents placement agents, issuers, broker-dealers, public and private companies, investment banks, financial institutions, private funds, and investment advisers.

Debbie also represents family offices, private funds, investment advisers and other clients in connection with impact investing including establishing Environmental, Social, and Governance (ESG) investment policies and practices and with policies regarding anti-money laundering (AML), Foreign Corrupt Practices Act (FCPA), derivatives and FINRA and SEC-compliant investment regimes and operations.

Add comment

Updates on Regulation, Trading, and Market Reforms for the Alternative Investment Community