Industry Faces “Holy Trinity” Of Tax Issues

The debate over raising the tax rate on carried interest has re-ignited, after President Barack Obama promoted the idea indirectly in his June 29 press conference as a way to raise revenue and close the ballooning budget deficit.

Meanwhile, two other potential tax issues loom for buyout professionals, including interest expenses deductions and the flow-through treatment of limited partnerships. Together with carried interest, they form what Doug Lowenstein, the president of the Private Equity Growth Capital Council, called the “holy trinity” of tax issues.

Lowenstein said it was too early as yet to predict whether a tax hike on carried interest would finally pass. “I wouldn’t put it in the ‘likely’ category, but I wouldn’t put it in the ‘unlikely’ category either,” he told Buyouts. “These are very fluid negotiations…in that kind of environment you can’t be over-confident with how something will turn out.”

A few months ago, Sen. Max Baucus, Democrat of Montana and chairman of the Senate Finance Committee, and Rep. Dave Camp, Republican of Michigan and chairman of the House Ways and Means Committee, requested a study on how interest payments deductions affect debt.

Critics of the current corporate tax system say that allowing companies to deduct interest expenses encourages businesses to take on more debt, adding risk to the economy. But eliminating the tax deduction would carry other costs, business experts warn. “It would be an absolute body blow to the capital markets,” Fred Lane, vice chairman of investment banking at Raymond James, told Buyouts. “Forget just the buyout business. It would kill a lot of things. The stock market would go in a swoon.”

The Obama administration is also looking at creating an “entity tax” for investment partnerships, limited liability companies and S corporations, all of which are “flow-through” structures commonly employed by tax-savvy private equity firms. To read this entire article, go here.

Bernard Vaughan is a Senior Editor at Buyouts Magazine. Follow his tweets @BVaughanReuters.