McDermott Comment | Carried Interest: A Private Equity Tax Break Under Threat


James Ross, partner at law firm McDermott Will & Emery, said:

“Capital gains tax treatment for carried interests has been the subject of fierce debate since the global financial crisis. As a carried interest represents a proportion of the gain enjoyed by the investors in a private equity fund, it has been traditionally taxed in the same way as that return. However, as the private equity principals have not generally invested significant capital in order to acquire their carried interest, it is perceived by some as being equivalent to ordinary income.

“In recent years, the benefits of carried interest treatment have been chipped away. The ability to drive down the effective rate of tax through a technique known as “base cost shift” has been removed, higher rates of capital gains tax for carried interests have been introduced, and certain short-term carried interests are now taxed as income. Until now, the principle of capital gains treatment has remained intact. However, private equity executives are likely to be an easy political target for revenue-raising, so that may change.”