Among the private funds community, there is a relative consensus that a tax increase on carried interest will not be happening any time soon. According to the latest numbers in pfm’s current Quick Poll, 86 percent of respondents do not believe the tax on carried interest will change this year (or ever), while a mere 14 percent say that 2015 will be the year that the tax goes up.
However, if a vote were held today, 75 percent of Congress members would vote to raise taxes on private equity firms, according to a recent report in the New York Post. Carried interest currently is taxed at capital gains rates, but some regard this treatment as a loophole and the Republican opposition to doing away with the carried interest tax rate is waning, a source told the Post.
President Obama, the House Ways and Means Committee Chairman Paul Ryan (R-Wisc.) and Senate Finance Committee Chairman Orrin Hatch (R-Utah) all have voiced a commitment to tax reform in 2015. President Obama’s proposed 2015 budget would tax carried interest as ordinary income, which effectively would almost double its federal tax rate, to 39.6 percent for top earners.
“With private equity assets managed by US-registered managers reported to be at a $7.4 trillion gross level as of the end of 2013, the magnitude of potential tax revenue from an increase in the effective tax rate on carried interest profits is likely too big of a target for Congress to ignore for long,” said Hirschler Fleischer partner Brian Farmer in a recent article for pfm. “Prudent private equity managers and their investors should continue to consider how one another should be treated in the event tax rates on carried interest were to increase.”