Healthcare Tax Takes Bite Out Of Carried Interest

Apr 2 2013 | 10:29am ET

As the alternative investment industry girds for another fight over taxation of carried interest, a little-known new tax has already begun to eat into those profits.

President Barack Obama's 2010 healthcare overhaul included a new levy, the net investment income tax, which will take 3.8% of "unearned investment income" from the highest-earning taxpayers. And, according to a new white paper from law firm Hirschler Fleischer, the new tax is targeted specifically at hedge fund managers and gives them little opportunity to avoid it.

The NII, which took effect at the beginning of the year, taxes income from "trading in financial instruments."

Private equity fund managers, according to Hirschler Fleischer, may be able to avoid the levy, but only if they can demonstrate that their investments aren't passive. That could be hard: Federal tax law requires some 500 hours of work annually personally performing services for a business to shed the passive tag.

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