Carried Interest Tax Continues to Remain a Possibility

By W. Michael Howlett, Cherry, Bekaert & Holland, L.L.P. (CB&H)
Email: mhowlett@cbh.com

While not currently under direct legislative consideration by Congress, the implementation of a carried interest tax is still possible given the government's desire to increase revenue in light of sustained budget shortfalls.

Commonly involving real estate partnerships, carried interest arrangements include the exchange of partnership interest for services with profit distribution generally occurring once capital contributions have been returned.

Previously proposed legislation targeted such arrangements by attempting to tax the profit distribution by establishing a new rate between the capital gains rate and the ordinary income tax rate, such as 25 percent.

However, there continues to be significant opposition to such proposals that might either prove too burdensome from an administration perspective or tax investment activity as ordinary income. Since the prevailing sentiment seems to hold that the current system, though imperfect, works for the most part, taxpayers should continue to urge their representatives in Congress to err on the side of caution when considering future legislation.

Mike is a Tax Partner with CB&H and a member of the CB&H Real Estate & Construction Industry Group.