The draft of the American Jobs Act proposed by President Obama indicates that a major revenue raising offset provision in the legislation would be a carried interest provision taxing the income of hedge fund managers and other asset managers at ordinary income rather than at capital gains rates. Subtitle B of Title IV of the Act would amend the Internal Revenue Code to tax carried interest in investment partnerships as ordinary income
Current law allows service partners to receive capital gains treatment on labor income without limit, according to the White House, which creates an unfair and inefficient tax preference. Section 411 of the draft Act would tax as ordinary income, and make subject to self-employment tax, a service partner’s share of the income of an investment partnership attributable to a carried interest because such income is derived from the performance of services.
Section 412 contains special rules for partners providing investment management services to partnerships. To the extent that a service partner contributes invested capital and the partnership reasonably allocates its income and loss between such invested capital and the remaining interest, income attributable to the invested capital would not be recharacterized. Subtitle B of Title IV would be effective for taxable years beginning after December 31, 2012.