Tax carried interest as ordinary income

Carried interest tax provision makes it into jobs bill

Updated: Friday, June 4th, 2010 | By Angie Drobnic Holan

President Obama proposed a tax on carried interest during the campaign, and the idea appears to be headed for law.

Never heard of carried interest? It's a way of compensating executives, so that instead of wages or a salary, they get "interest" in a business. Income from that interest is taxed at a lower rate than regular wages. The Treasury Department has said the practice is growing among large private equity firms.

Democrats included the measure in the American Jobs and Closing Tax Loopholes Act, which extends measures for economy recovery, such as unemployment insurance and stimulative tax cuts.

The carried interest provision is expected to increase revenues and was included in the bill to offset its cost. House Ways and Means Chairman Sander Levin, D-Mich., and Senate Finance Chairman Max Baucus, D-Mont., said in a statement that the bill would  "close tax loopholes for wealthy investment fund managers."

This is substantial progress on this promise. But until the bill passes though, it remains In the Works.

Sources:

Thomas, the American Jobs and Closing Tax Loopholes Act, accessed June 3, 2010

CQ, 'Carried Interest' Tweak Included as Key Offset, May 20, 2010

U.S. Senate Committee on Finance, Baucus, Levin To Release Joint Legislation To Create Jobs, Extend Tax Cuts for Families and Businesses, Support Americans Looking for Work, May 20, 2010

Proposal would force some executives to pay higher tax rates

Updated: Tuesday, October 6th, 2009 | By Angie Drobnic Holan

Maybe it would help if you pretend you're an accountant while you read this.

Here goes: Some professionals who work as partners are compensated in way that takes the form of "interest" in a given business. Instead of taxing this compensation as normal income, the tax codes consider it as a capital gain and tax it at a lower rate.

President Barack Obama's proposal would change the law so this form of compensation would be taxed as regular income.

"The recent explosion of activity among large private equity firms has increased the breadth and cost of this tax preference, with some of the highest-income Americans benefiting from the preferential treatment," said the U.S. Treasury Department in its explanation of the proposal, which recommends that the rule change in 2011.

Congress must first approve this change if it is to become law. We rate it In the Works.

Sources:

U.S. Treasury Department, General Explanations of the Administration"s Fiscal Year 2010 Revenue Proposals , May 2009

Tax Policy Center, Tax Proposals in the 2010 budget , accessed Oct. 2, 2009