President Obama released his FY2013 budget plan on Monday, February 13, 2012. As expected, it contained the usual assaults on the 1% of taxpayers (Adjusted Gross Incomes above $344K) who are already paying close to 40% of the total personal taxes collected.
One of the “usual suspects rounded up” was taxing Carried Interest at ordinary tax rates rather than the capital gain rate. Carried Interest is the amount of gain that an Investment Firm (Venture Capital, Private-Equity, Buyout Firm, Hedge Fund, etc.) gets to keep on a successful investment and distribute to its employees. It is usually 20% of the gain.
So, if the Firm invested $1M in a business and after several years, cashed out of this investment by selling its share for $3M, there would be a $2M gain. The Investment Firm gets to keep and distribute to its employees 20% or $400K of that gain. The remaining 80% or $1.6M of the gain is distributed to the Investment Firm’s investors (pension plans, endowments, high-net worth individuals, etc. – called Limited Partners or LPs)
Under current tax law, this $400K distribution is taxed to the employees as a capital gain at 15% and the tax is $60K. Under the Obama proposal, this gain would be taxed as ordinary income. Assuming the top rate of 39.6% (Obama FY2013 Budget), that bonus would cost the employee $158K in taxes, an increase of 164%.
The argument for taxing this gain at ordinary income tax rates is that the funds used for this investment were contributed by the Investment Firm’s investors, not the Investment Firm’s employees. Therefore, these employees did not have any money at risk.
Now, we do not have a “horse in the race” here, as we are not an Investment Firm, but feel taxing carried interest at ordinary income tax rates, especially for Venture Capitalists (VC), is very unfair. Our reasons:
Salary |
Bonus |
Total |
|
Venture Capitalist I |
$164,228 |
$22,327 |
$186,555 |
Venture Capitalist II |
$241,741 |
$82,411 |
$324,152 |
Venture Capitalist III |
$276,801 |
$196,922 |
$473,723 |
In our opinion, the Venture Capital industry has created millions of good paying American jobs and this Administration and President are totally out of touch penalizing the talent in this industry for being successful. Doing so, will result in fewer good paying US jobs being created and be harmful to the US economy. Also, we feel that more money in the hands of taxpayers, rather than in the hands of politicians, is a better way to stimulate our economy.
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IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.
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