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- March 1, 2013: Vol. 25, Number 3

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Carried interest: Tax treatment remains status quo

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In simple terms, “carried interest” is the share of the profits from a partnership (or another entity that is taxed as a partnership) that is distributed to the general partner (who is often an adviser, developer or manager) of the partnership that is greater than the manager’s pro rata share of the capital contributed to the partnership. Carried interest is also often referred to as a “promote” or “incentive distribution.”

Many look at carried interest more as compensation to the manager for services it provides to make the partnership successful (such as finding and managing the partnership’s investments) rather than a return on an investment in the partnership. Others believe that carried interest should be viewed as “sweat equity” that provides a reward to the manager for making the partnership profitable. Carried interest also can be paid in the form of an increased

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