Carried Interest Tax Update – White House’s 2012 Budget Includes Tax Increase Proposal

By Asher Bearman on February 16, 2011

Posted in Investors, News and Recent Events

CONTRIBUTED BY
Asher Bearman
asher.bearman@dlapiper.com

As of the end of 2010, the debate over increasing the tax rates on carried interest seemed to have died but it’s now back as part of the Fiscal Year 2012 budget proposal from the White House. Under the proposed budget, the tax on carried interest would be at ordinary income rates, rather than capital gain, representing more than a 2x increase in the current rate for most fund managers. See page 186 of the budget proposal here. A change to rdinary income rates would impose a higher tax rate than legislation proposed in 2010, which generally included blended rates at either 50/50 or 75/25 (assuming an extended holding period), rather than 100% ordinary rates. That said, the prior legislative proposals were unable to get through the Senate, so this budget proposal probably needs to be considered in that historical context.

Quoting Bloomberg BusinessWeek:

The proposal also would bring back pre-2001 tax rates on income and capital gains for individuals earning more than $200,000 annually and married couples making more than $250,000. The estate tax would return to 2009 levels with a $3.5 million per-person exemption and a 45 percent top rate. Under a law Obama signed in December, lower rates expire at the end of 2012.

“The president was unable to reverse the Bush tax cuts this past year with a majority in each house of Congress, so it’s very difficult to see how he will be successful over the next two years with the Republicans firmly in control of the House,” said Neal Weber, managing director in charge of RSM McGladrey’s Washington national tax office.

The National Venture Capital Association had this to say on their blog:

Yesterday President Obama released his budget proposal and the consensus in Washington D.C. was that it was dead on arrival. With Republicans in control of the House of Representatives, it is expected that they will be putting forth their own budget for a vote and it is not expected to resemble the President’s proposal.