New York City Quietly Raises Taxes On Hedge Funds, Private Equity Managers

Dec 7 2011 | 1:55am ET

As lawmakers in Washington wrestle over higher taxes that would impact alternative investment managers and those in Albany, N.Y., impose them, policymakers in the world's hedge fund capital have hit upon a tax hike by stealth.

New York City's Department of Finance has stopped allowing hedge fund and private equity fund managers claim a longstanding exemption from the city's unincorporated business tax. Previously, alternative investment firms had been able to skirt the 4% tax on expenses such as staff compensation.

Now, the department is disallowing such exemptions, a change in policy based on a review of "expense attribution for the investment partnership industry, as we have done for other industry sectors," a spokesman told MarketWatch. The policy change was approved by Mayor Michael Bloomberg, who last year fought a state plan to increase taxes on hedge fund managers who work in New York but live out of state.

"As a result of the disallowance, there is an increase in the unincorporated business tax and/or a reduction in net operating loss carry forward," Ernst & Young, which along with PricewaterhouseCoopers discovered the policy change last month, wrote to clients.

How deeply the change will impact the hedge fund and private equity industries is unclear. One person familiar with the thinking of a publicly-traded asset manager told MarketWatch that the tax is "not insignificant to the business," although it is "volatile and based on activity." Another source dismissed the higher taxes as "noticeable but immaterial" to his firm.

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