How will closing the so-called "carried interest loophole affect searchers?

searcher profile

July 28, 2022

by a searcher from Harvard University - Harvard Business School in Dallas, TX, USA

https://www.barrons.com/articles/senate-bill-carried-interest###-###-####

I'm sure it will depend funded vs un-funded but it seems like this could hit traditional searchers pretty hard if it goes through. I'm just not sure how searchers would be categorized given that they often put up no capital of their own and are working in the business.

The natural follow on question if this does impact searchers is, "do searchers need to think differently about valuation?"

Thanks for any thoughts!

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Let me start off by saying I am not an accountant, so my understanding of the "Carried Interest Loophole" is pretty basic. But based on my knowledge and what I read, I am struggling to understand how this could hurt searchers. I am open to any input. Searchers may not put much equity in, but typically their compensation is going to come from salaries & wages or from distributions, neither of which would be impacted by this change.

Does the concern relate to how this would impact investment from outside capital sources? Are most of the outside capital sources structuring the capital they put in to be returned via an interest payment versus distributions? Again, just curious and trying to understand how it could impact my clients.
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Reply by an investor
from Fort Lewis College in Denver, CO, USA
Also not an Accountant, but I believe it has a significant tax impact on searchers who have an "exit" in their future. The whole point is to not allow you to take advantage of the lower, long term capital gains tax rate if your equity is not from capital investment.

If you co-invest, that portion of your equity should benefit from capital gains tax treatment. Your "other" equity, (i.e. carried interest) is then taxed at regular income tax rates upon sale. Maybe the bill will have some carveouts under a certain $$ cap, but I doubt it. Hopefully, when you sell, you have been HUGELY successful, but at that point the tax impact is significant!
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