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House Votes to Increase Tax on Carried Interest

H.R. 4213, the Tax Extenders Act of 2009, passed on a 241-181 vote after a debate focused mainly on the bill’s offsets: higher taxes on carried interest income and a set of enforcement and information reporting measures targeting offshore tax havens. The bill contains a provision that would change the tax status of a “carried interest” from capital gains to ordinary income, with the purpose of paying for year-end tax extensions.

Impact on Members of an LLC Receiving a Carried Interest

H.R. 4213 would finally close the loophole for what investment fund managers and venture capitalists call “carried interest.”

In general, a middle-income person typically pays income taxes as high as 35 percent plus payroll taxes. Investment fund managers can receive millions of dollars in compensation for their work, but by calling this income “carried interest,” they pay only income taxes at a 15 percent rate.

The “carried interest” label essentially allows these fund managers to pretend that this income is a return on capital investments (and thus eligible for the exception in the income tax that subjects capital gains to an income tax rate of no more than 15 percent).

What all this means is that there is a good chance that investment fund managers and venture capitalists will soon be paying the ordinary income rate on carried interest instead of the capital gains rate.

Learn more about drafting an LLC Operating Agreement to include the grant of a “carried interest” at www.myllcagreement.com


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