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Private Equity Braces for Life Without Tax Advantage

Friday, 21 May 2010 | 2:48 PM ET

As legislators move closer to passing a bill designed to clamp down on the tax treatment of carried interest as a capital gain rather than ordinary income, sources at private equity firms tell me they are already figuring out ways to insure their compensation is not reduced.

It’s still unclear what plan, if any, will become law and so the firms have not solidified their approach, but are considering various options to negate the impact that a higher tax on carried interest would bring.

One idea making the rounds would involve delivering shares of their acquired companies to the partners of a given firm right now (if there is a mark to market gain). That way, when the portfolio company is sold, the parties can book their stake as a capital gain, rather than take money from a pool that has been taxed as ordinary income.

Time will tell what other firms choose to do to make sure they are not badly hurt by the proposed change in the tax law. But as someone who has followed this industry for many years, I can tell you that when it comes to making money for themselves, private equity always finds a way.

Want a full explanation of carried interest? Read my previous blog: Anger, Taxes and Wall Street.

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