Carried interest
The captain of the ship would take a 20% share of the profit from the carried goods to pay for the transport and the risk of sailing over oceans.
In private equity, the standard carried interest allocation historically has been 20% for funds making buyout and venture investments, but there is some variability.
"[9] Private equity funds distribute carried interest to managers and other investors only upon a successful exit from an investment, which may take years.
Historically, carried interest has served as the primary source of income for manager and firm in both private equity and hedge funds.
Long-term capital gains are returns on financial and other investments that have been held for a certain statutorily determined amount of time before being sold.
[12] The long time horizons of funds allow their returns, including the manager's carried interest, to typically qualify as long-term capital gains.
Furthermore, taxes on the increase in value of an investor or manager's share of the fund are not due until a realization event occurs, most commonly the sale of an investment.
[11] Treatment of active partners' return on investment as capital gains in the United States originated in the oil and gas industry of the early 20th century.
The logic was that the non-financial partner's "sweat equity" was also an investment, since it entailed the risk of loss if the exploration was unsuccessful.
[17][18][19] The implication of treating private equity carried interest as capital gains is that investment managers face significantly lower tax burdens than others in similar income brackets.
Critics of the carried interest system (as opposed to critics of the broader tax systems that affect private equity) primarily object to the ability of the manager to treat most of their return as capital gains, including amounts above and beyond the amount directly related to the capital contributed by the manager.
[22] However, some feel this criticism is not appropriate for small businesses that are not blind pools as the manager did risk capital prior to the partnership formation.
In 2009, the Obama Administration included a line item on taxing carried interest at ordinary income rates in the 2009 Budget Blueprint.
[citation needed] Billionaire Warren Buffett, who also benefits from the capital gains system, famously opined that he should not be paying lower taxes than his assistant.
[34] As of 2015[update] some in the private equity and hedge fund industries had been lobbying against changes, being among the biggest political donors on both sides of the aisle.
[35] In June 2016 presidential candidate Hillary Clinton said that if Congress were to fail to act, as president she would ask the Treasury Department to use its regulatory authority to end a tax advantage.
This may strictly have applied to the carried interests of many venture-capital executives, even if they were partners and not employees of the investing fund, because they were often directors of the investee companies.
In 1987, the Inland Revenue and the British Venture Capital Association (BVCA[39]) entered into an agreement which provided that in most circumstances gains on carried interest were not taxed as income.
