Should the Tax on Private Equity Gains be Increased?

United States tax regulators are bracing for a possible tax increase on income gained by private equity managers, referred to as “carried interest”.

The IRS must be prepared to write meticulous regulations to impose any new laws if this issue continues to gain public interest. The agency’s next step is to make suggestions to lawmakers as it sees problems, according to an IRS official.

“We have to be prepared for the new laws,” the official said, when asked if the issue was being considered. “We don’t want surprises,” the official stated, requesting to remain anonymous.

Carried interest is the section of earnings that private equity fund managers make on their investments. The earnings can be massive if the investments do well, thereby making its managers quite wealthy.

President Barack Obama and the majority of Democrats in Washington are in favor of increasing the tax rate on these types of earnings, which are currently taxed at the 15 percent capital gains rate instead of the 35 percent rate applied earnings made by those who fall into the highest income bracket.

CONGRESSIONAL RESPONSE

The carried interest suggestion is an age old debate that will likely be brought up again at the end of the year, when Congress is faced with its monetary deadlines often referred to as “taxmageddon”.

If Congress fails to act, all lower individual tax rates implemented by George W. Bush will expire. Action is not expected to be taken on these issues until after the Nov. 6 elections.
Advocates for keeping the lower carried interest rate claim that fund managers are taking “risks” that could possibly lose them money, thereby the income is an investment, which is subject to the lower tax rate.

Lawmakers came close to changing the way that private equity gains were taxed at the end of 2010, but the proposals eventually died in the United States Senate.

A few moderate Democrats are concerned with the business impact of the tax changes, ultimately leading to the derailing of the efforts in the Senate.

Another reason lawmakers are motivated to raise the tax is because it would be a valuable source of revenue to help balance a desperate budget.

While the IRS prepares to make changes to tax laws if necessary, taxpayers should be prepared when facing IRS problems. If you are in trouble with the IRS, call the professional staff at JG Tax Group today.