A Way Around the Carried Interest Debate

March 29, 2010
Both the Obama administration and members of Congress have proposed to increase taxes on fund managers’s income from carried interests in the funds they manage. As a result of these proposals, the after-tax return on investments for fund managers could decrease by 30 percent or more. The proposals would affect partners in almost any partnership (or members in almost any LLC) if they perform any financial advisory services for that entity. However, very similar corporate structures are unaffected, and Congress has yet to provide a clear reason why buyout fund managers should be treated differently from corporate owner-managers. While it may be too late to save existing funds, it may yet be possible to structure new buyout funds in a way that protects capital gains on investments.