Could the loss of carried interest double your tax bill?

Carried Interest has moved from being an obscure tax term to being one of the few policy issues to be attacked by both candidates during the 2016 US Presidential debates.

What is Carried Interest, the so-called “Billionaires Loophole”? What is the impact of its possible / probable demise on those who use this tax scheme? How can those who will be impacted by change do to prepare themselves to avoid the promised effects? Here at Lesperence and Associates we have created a white paper exploring all of these questions. We provide real world practical steps that those who generate Carried Interest can take. We can help you to protect yourself from a pending doubling of your tax bills.

Click on the following link to read and download the paper:


What is Carried Interest?

The concept emerged during the Italian Renaissance and refers to a ship captain’s share of a voyage’s profit earned by their efforts. In the 1920’s, the US oil and gas industry adopted this concept to deal with a common situation where some partners put up capital, while other partners contributed ‘sweat equity’ by performing the actual daily work on a particular venture. When cashing out, the I.R.S. taxed all partner profits at capital gains rather than the higher ordinary income rates. In the 1950’s, Carried Interest was incorporated into the US tax code.

Who generates it?

Eventually US partnerships in real estate, venture capital, private equity and hedge funds adopted the concept of ‘Carried Interest’. While Real Estate and Venture Capital Partnerships may vary substantially in their ‘capital’ vs. ‘sweat equity’ division between partners, Private-Equity and Hedge Fund Partnerships have come to develop a more standard “2 and 20” model. This involves the PE or HF partnership charging 2% of “Assets under Management” (“AUM”) for basic costs and then 20% (sometimes higher) of profits over a set standard “high water mark” for compensation if their sweat equity results in a profit for the partnership overall. This later payment (if success occurs) is then taxed at the long term capital gains rate, which is currently 15% for capital gains from $37,651 to $413,350 and 20% on capital gains above this threshold.

Why is carried interest under threat to be closed?

During the 2008 fiscal crisis, the term “Carried Interest” went from an archaic industry term to Occupy Wall Street placards. Barack Obama promised to do away with what was termed “The Billionaire Loophole”. While legislation was introduced during both his presidential terms, it was not passed because of successful industry lobbying combined with an intransigent Congress.

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