What are the options for reforming the taxation of carried interest?
• The nonrecourse loan alternative would tax carried interest income as if the GP’s individual partners received an interest-free loan from the limited partners in order to purchase the portion of their carried interest that was not attributable to any upfront financial investment in the fund on their part. Each individual partner’s hypothetical loan would be treated as if it was secured by this portion of his carried interest and was “nonrecourse” in the sense that the limited partners had no right to pursue his other assets. This approach would have three tax consequences for the GP’s individual partners. • Each year, every individual partner would be taxed at ordinary rates on an amount equal to a market interest rate on his hypothetical loan. Under current law, when an individual receives an interest-free loan in exchange for his labor, he is taxed on the interest forgiven as if it were wage and salary income and thus at ordinary income tax rates. The interest rate is not adjusted
