The House of Representatives on December 7, 2009 passed the so-called “Extender Bill,” This is 2010 version of the annual bill which will now extends about 50 expiring tax provisions to 2010. These include the Sales Tax Deduction, Standard Deduction for Real Property Taxes, Deduction for Qualified Education Expenses, School Teacher deductions, 15 Year Deprecation for Certain Property, R & D Credit, Tax Incentives for Biodiesel and Renewable Diesel, Certain Tax Relief for Disaster Losses, etc.
Something new in this bill is a new provision to tax “carried interest” income as ordinary income (rates of up to 35%) as opposed to capital gains (currently 15%). This is directed at the Private Equity/Hedge Fund operators, who in recent years have had garnered some really bad publicity because they were making billions of dollars and paying tax at the 15% capital gains tax rate (note the word “were”—I don’t know how many are making this kind of money now).
The legislation is so broad based, however, that it will also cause a decrease in capital formation for real estate projects at a time when the real estate industry really needs the investment. A lot of real estate projects include some type of carried interest for the developer—if the law passes, the after tax return, and therefore his or her tolerance for risk, will decrease. And in this economic climate, we are seeing some lenders taking carried interests in order to finance or continue to finance projects—and with his new law, lenders will not be motivated.
Many other industries use the concept of carried interests, but one in particular is oil and gas exploration. Once again, this law will reduce investment in oil and gas.
Most of the provisions of the Extender Bill will be welcomed. The carried interest provision, however, is likely to reduce investment in a lot of industries, at a time when that investment is really needed. Hopefully the Senate will not pass the law with that provision in it.
Posted by David P. Donnelly, CPA
