Tax carried interest as ordinary income

Proposal would force some executives to pay higher tax rates

Updated: Tuesday, October 6th, 2009 | By Angie Drobnic Holan

Maybe it would help if you pretend you're an accountant while you read this.

Here goes: Some professionals who work as partners are compensated in way that takes the form of "interest" in a given business. Instead of taxing this compensation as normal income, the tax codes consider it as a capital gain and tax it at a lower rate.

President Barack Obama's proposal would change the law so this form of compensation would be taxed as regular income.

"The recent explosion of activity among large private equity firms has increased the breadth and cost of this tax preference, with some of the highest-income Americans benefiting from the preferential treatment," said the U.S. Treasury Department in its explanation of the proposal, which recommends that the rule change in 2011.

Congress must first approve this change if it is to become law. We rate it In the Works.

Sources: U.S. Treasury Department, General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals , May 2009

Tax Policy Center, Tax Proposals in the 2010 budget , accessed Oct. 2, 2009