Little Known Tax Could Have Big Time Hurt
A: Some food for thought. Congress's tax writing committees are weighing taking back a little known tax break that allows private equity firms and real estate partnerships to pay only 15%, instead of 35%, on capital gains generated from performance fees. According to an article in The NY Times today, the performance fees represent most of these firms reported income. Should this bill be passed, one has to question the 'sexyness' of these types of investment firms & partnerships if 20% of their profits are now going to be taxed again.
Carried Interest - The portion of any gains realized by the fund to which the fund managers are entitled, generally without having to contribute capital to the fund. Carried interest payments are customary in the venture capital industry, in order to create a significant economic incentive for venture capital fund managers to achieve capital gains.
According to the NY Times:
Leaders of the tax-writing committees in Congress are considering a new proposal to end a little-known tax break that has allowed wealthy financiers who run private equity firms and hedge funds to cut their total income tax bills by billions of dollars, aides to lawmakers say.Consumers are already overwhelmed with trying to understand macro economics on their investments without thinking about future changes in the tax code that may REMOVE a significant source of buying power that we all got used to. For me, this is territory I understand very little about. What I do understand is that when there are gray areas in the tax code, or little nooks that are hard to find but easy to benefit from, many large investment firms will find it and exploit it adding tons of $$$ towards a specific industry. The thought of losing this tax haven and the benefit that comes with it may mean those $$$ will be put to work elsewhere.By contrast, the new proposal would affect many more firms and could raise $4 billion to $6 billion annually. It may be attached to a tax bill expected as early as July as a way of helping offset the cost to the Treasury of relieving the growing burden of the alternative minimum tax on large numbers of taxpayers, aides said.
At the heart of the newest proposal is an attempt to bar private equity and hedge fund operators from a longstanding, but little understood, practice that has allowed them to pay a lower capital gains rate of 15 percent instead of the ordinary top income tax rate of 35 percent on their performance fees, which typically represent most of their annual income.
A change in the tax code could also fall on venture capital firms, real estate partnerships and many oil and gas companies -- all of which use similar accounting to justify paying the lower tax rate.
Lots of ifs here, but something that should seriously be on everyone's radar. The article continues...
Raising taxes on performance fees, which are known as "carried interest" on Wall Street, would generate billions. Another possible source of increased tax revenue would be a cap on offshore tax deferrals.No surprise there! I'm sure there are tons of business models out there already wrapped around this little know tax break. If the break gets filled in, well, the model must change or the firm's structure will have to adjust for the loss of net profits."This is the No. 1 issue all offices are getting lobbied on right now," a senior aide in the Senate said. "Carried interest is billions; publicly traded partnerships is millions."
I sure hope the full implications of this type of tax code change are considered by our lawmakers before pushing this bill through. If they aren't, an unintended market adjustment could occur.
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