Over the past few years, there have been numerous proposals in Congress1 and in President Barack Obama’s budget proposals2 to change the federal taxation of so called “carried interests.” With the recent revelation that Republican presidential hopeful Mitt Romney had paid an effective federal tax rate of less than 15 percent on his income in 2011, a substantial portion of which appears to have been attributable to carried interests on investments from his time with Bain Capital, the issue has again come into the news. This article will briefly touch upon the proposed federal changes but will primarily focus on the impact such changes would have on the New York State Personal Income Tax (PIT) and the New York City Unincorporated Business Tax (UBT).
Background
A carried interest is generally considered to be an interest in a partnership or limited liability company (LLC) that entitles the holder of such interest to a share of the profits of the partnership or LLC that is greater than the holder’s share of the capital of the entity.3 Carried interest arrangements are often seen in hedge funds, private equity funds, venture capital funds, and real estate funds. Although there are a variety of possible forms carried interest arrangements may take, a typical structure has the following characteristics:
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