House Votes To Tax Carried Interest As Ordinary Income

The US House of Representatives today voted to subject the carried interest to tax as ordinary income and employment taxes.  

This will result in venture capitalists and general partners of real estate investment partnerships paying a substantially higher rate of tax on their “carry”, which is currently taxed as capital gain and a 15% tax rate.  Ordinary income tax rates are as high at 35% (but that rate will increase to 39.6% when the Bush tax cuts expire), and employment taxes can be an additional 15.3%.

Related stories:

The text of the bill.   

A summary of the bill from the Ways & Means committee.

Blog from peHUB

Press Release from National Venture Capital Association.

Joint Committee On Tax Technical Explanation.

From the Ways & Means Committee Summary:

CARRIED INTEREST

Taxation of carried interest as ordinary income. The bill would prevent investment fund managers from paying taxes at capital gains rates on investment management services income received as carried interest in an investment fund. The bill would require such managers to treat carried interest as ordinary income received in exchange for the performance of services to the extent that carried interest does not reflect a reasonable return on invested capital. The bill would continue to tax carried interest at capital gain tax rates to the extent that carried interest reflects a reasonable return on invested capital. This is consistent with the proposal to change the tax treatment of carried interest that is included in the President’s FY2010 Budget. This provision has previously passed the House of Representatives on two occasions: first, as part of H.R. 3996 (110th Congress) where it passed by a vote of 216 to 193; and second, as part of H.R. 6275 (110th Congress) where it passed by a vote of 233 to 189 (with 10 Republicans joining with 223 Democrats in support). This proposal is estimated to raise $24.616 billion over 10 years.

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About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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  • http://www.wac6.com William Carleton

    Joe, what’s the prognosis on what the Senate might do, or has it done something already? Also, what’s a “reasonable return on invested capital” for purposes of determining how much of the compensation should be taxed at a capital gains rate? That is going to be a challenging concept to draft!

  • Joe Wallin

    Bill, I have to believe that the prognosis in the Senate is not good, given the dire state of our fiscal affairs.