Taxation of Hedge Fund and Private Equity Managers (CRS Report for Congress)
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| Release Date |
Revised March 7, 2014 |
| Report Number |
RS22689 |
| Report Type |
Report |
| Authors |
Mark Jickling, Specialist in Financial Economics; Donald J. Marples, Specialist in Public Finance |
| Source Agency |
Congressional Research Service |
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Summary:
Private equity and hedge funds are investment pools generally available only to institutions and\r individuals able to make investments in excess of $200,000. Private equity funds acquire\r ownership stakes in other companies and seek to profit by improving operating results or through\r financial restructuring. Hedge funds follow many strategies, investing in any market where\r managers see profit opportunities. The two kinds of funds are generally structured as\r partnerships: the fund managers act as general partners, while the outside investors are limited\r partners. Fund managers are compensated in two ways. First, to the extent that they invest their\r own capital in the funds, they share in the appreciation of fund assets. Second, they charge the\r outside investors two kinds of annual fees: a percentage of total fund assets, and a percentage of\r the fund\'s earnings. The latter performance fee is called "carried interest" and is treated as capital\r gains under current tax rules.\r Since the 110th Congress, concerns have been raised that the current tax rules are inequitable and\r inconsistent with some tax policy principles. Proposals that address this concern have focused on\r taxing some portion (or all in some cases) of carried interest as ordinary income. In the 113th\r Congress, the Tax Reform Act of 2014 would tax carried interest, exempting income earned from\r real estate, as ordinary income. S. 268 and the President\'s FY2014 Budget Proposal would tax\r carried interest as ordinary income, while taxing another form of compensation, known as\r enterprise value, as capital gains income. According to the Joint Committee on Taxation, the\r provision in the Tax Reform Act of 2014 would raise $3.1 billion in revenue in the FY2014-\r FY2023 budget window, while the provision in the President\'s FY2014 Budget Proposal would\r raise $17.4 billion in revenue in the FY2014-FY2023 budget window.\r This report discusses the major issues surrounding the tax treatment of hedge fund and private\r equity managers and will be updated as legislative developments warrant.
