Understanding Carried Interest Is there a tax loophole that benefits fund managers?

National Review Online ^ | January 31, 2012 | Alan D. Viard

[C19fan]

Mitt Romney’s release of his tax returns has pushed the arcane issue of “carried interest” — the share of an investment fund’s profits given to its managers as payment for their services – back into the headlines. Critics have renewed their calls to tax the carried interest as ordinary income. Unfortunately, the populist rhetoric used by some critics can obscure the facts about how carried interest is actually taxed.

[C19fan]

I am as conservative as they come but if it quacks like a duck and walks like a duck it is a duck, ie carried interest = tax loophole for hedge fund mangers. The whole scheme is a way for investors in hedge funds to give its managers a "skin in the game" at the expense of the rest of us.

[GadareneDemoniac]

If the managers invest their cash in the fund and share in the profits and losses like other investors, the dividends and interest should be taxed as such. Just like Warren Buffet: his company pays no dividends so all his income is capital gain (as I understand it).

HOWEVER, IRS has the right to recharacterize income as what it is. If it’s compensation, it should be taxed as such. IRS can disallow “unreasonable” compensation - both high and low.

Lots of small business people have formed S corporations and claim that all their income passes through as ordinary dividends, thus avoiding the Social Security bite on compensation. Unfortunately for them, IRS is going after them with both barrels to recharacterize the earnings as compensation. Why don’t they apply the same rules to the big boys?

[thouworm]

From leftist magazine, Mother Jones.

"Bain was doing its part to make Romney's vision a reality. The firm spent $300,000 between August of 2007 and April of 2008 lobbying the House and Senate on bills that threatened the carried interest loophole. Along with other private equity titans like Kohlberg Kravis Roberts and Apollo Management, Bain and its ilk paid lobbying shops, public relations firms, and trade groups like Ogilvy and the Private Equity Growth Capital Council an estimated $15 million between January 2009 and April 2010 to convince lawmakers to keep the loophole alive."

How Bain's Lobbying Saved Mitt Millions: Private equity titans like Bain Capital used K Street to preserve the GOP front-runner's favorite—and most lucrative—tax loophole