With Tax Advantages Looking Shaky, Private Equity Seeks a New Path

According to New York Times’ Jane Sassen, as Washington grapples with the country’s fiscal woes, the private equity industry is grudgingly facing a new reality: its long-held tax advantages are likely to disappear.

For years, private equity has quashed efforts to raise taxes on so-called carried interest income, the profits partners receive as part of their compensation. Those earnings are considered capital gains, so they are taxed at a much lower rate than ordinary income.

While few concede defeat publicly, the industry is rethinking its strategy. Rather than trying to stop the changes outright, lawyers and executives behind the scenes are trying to minimize the hit if it happens.

Private equity recognizes the shifting politics. In the current budget debate, sacred cows like the tax deductions for home mortgage interest and charitable donations are on the table, along with potential cuts to Social Security and Medicare.

“Once they start looking for revenues, carried interest will be on the list,” said Anne Mathias, director of Washington policy research at Guggenheim Partners, a financial services firm. “You can hear it already: ‘We need that money, or Grandma won’t get a new hip.’ ”

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