Carried-Interest Tax Hike Delayed Until 2011

May 28 2010 | 11:03am ET

Hedge fund and private equity managers will pay higher taxes on their share of their funds’ profits, but not just yet.

The tax bill expected to go to a vote this morning in the House of Representatives would close the so-called “carried-interest” loophole beginning on Jan. 1, 2011, rather than this year, according to House Ways and Means Committee Chairman Sander Levin (D-Mich.). Holding off on the tax hike will give those affected by it a chance to adjust, Levin said.

The proposal, which will go to the Senate after the Memorial Day recess, would tax managers’ performance fee income as ordinary income, rather than capital gains, as is the case now. That could push the tax rate on that income up from 15% to 39.6%, the new top rate for ordinary income tax proposed under the legislation.

The bill would also impose the ordinary income tax rate on money earned by hedge fund and private equity honchos who sell part or all of their firms. That provision is designed to keep managers from skirting the main carried-interest rules.

Unsurprisingly, the alternative investments community is not happy.

“This bill would make investment partnerships the only businesses in America whose owners would be ineligible for long-term capital-gains treatment,” Douglas Lowenstein, head of the Private Equity Council, told Bloomberg News.

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