Deals

New Senate tax idea favours long-term carry

The latest twist in the Capitol Hill carried interest drama would treat 65% of carried interest as ordinary income, but that would drop to 55% for investments held for seven years or more.

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US Senator Max Baucus, the Democratic chairman of the Senate Finance Committee, has proposed an amendment that would decrease the percentage of carried interest characterised as ordinary income to 65 percent from the House of Representatives' proposal of 75 percent.

The new plan, if enacted, would still mean that only 35 percent of carried interest would continue to be taxed as capital gains, which currently enjoys a low 15 percent tax rate. Ordinary income in the US is taxed as high as 39 percent.

However, the Senate proposal seems designed to encourage long-term holds. The amendment decreases the amount of carried interest that is characterised as ordinary income to 55 percent for the sale of investments held for seven years or more.

Baucus’ amendment would soften the blow the House dealt to the private equity and private equity real estate industry last month.

The US House of Representatives on 28 May voted 215-204 in favour of HR 4213, called The American Jobs and Closing Tax Loopholes Act of 2010. That bill raised eyebrows because for the first time it proposed a hybrid treatment of carry, with 75 percent of carried interest characterised as ordinary income and 25 percent deemed capital gains.

Currently, all carried interest is taxed at the capital gains rate of 15 percent, although that rate is set to rise to 20 percent when the tax cuts enacted by former President George W. Bush expire next year.

Private equity and real estate lobbyists have stepped up efforts to reach members of the Senate since last month’s House vote.

According to a study released today by the industry advocacy group, the Private Equity Council, the impact of an increase in carried interest tax would be swift and broadly felt across the industry.

The US House bill could reduce private equity investment by between $7.7 billion and $27 billion per year, according to PEC estimates.

Baucus’ amendment estimates that the provision would raise $14.45 billion in tax revenue over 10 years. If enacted the new tax rates would apply beginning 12 December 2012.