Taxation of Carried Interests for Senior-Level Fund Managers

March 28, 2019

Carried interest arrangements have been common for years in many types of private investment funds (Funds), including private equity, real estate and hedge funds. Carried interest arrangements can be controversial, in part, because of the ability of Fund Managers (defined below) to treat the pass-through of earnings in certain types of Funds as long-term capital gains for tax purposes, notwithstanding that the carried interest arrangement provides for compensation in connection with the performance of personal services by the Fund Manager.

This article summarizes the principal U.S. federal income tax and related design considerations associated with carried interest arrangements for individuals (Fund Managers) who are employed by or otherwise provide services to sponsors of Funds. This article is intended to provide background to those interested in the design of carried interest arrangements and to serve as a useful practical checklist of relevant tax considerations; it is not intended to be either a comprehensive analysis of the large number of tax issues that may arise in the context of carried interest arrangements or serve as a catalogue of all potential design considerations.

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