Hedge Funds Review – US hedge fund managers could be subject to higher personal taxes if changes to the taxation rules included in President Barack Obama’s 2010 budget proposal are adopted.

The budget proposal includes measures to treat carried interest as ordinary income as opposed to capital gains for tax purposes. That would raise taxes on income earned from performance and incentive fees from the current rate of 15% applicable to capital gains to over 39%.

Carried interest has been a sensitive topic in Washington for many years. Some politicians have argued that hedge funds and private equity groups have used the carried interest exemption to avoid paying their fair share of taxes.

The proposed change in tax rules could have a deep impact on the earnings of hedge fund managers. The compensation structure at many hedge fund companies puts the onus on performance and incentive fees as the principal source of income for the manager.

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Tags: barack obama, budget proposal, capital-gains, compensation structure, current-rate, deep impact, earnings, equity groups, fair share, fund-managers, incentive fees, measures, onus, politicians, principal source, sensitive topic, tax purposes, taxation

Bloomberg – Executives at buyout, venture-capital and hedge-fund firms will pay an estimated $24 billion more in taxes over nine years if President Barack Obama gets his way.

Obama’s 2010 budget proposal, released today, proposes raising taxes on the managers by treating carried interest, the portion of profits they take from successful investments, as ordinary income instead of capital gains. That change would boost the tax rate, starting in 2011, to 39.6 percent for most executives from the 15 percent they now pay.

The proposal applies to partnerships that receive a portion of the profits they make for their clients. It will likely reignite a debate begun in 2007 amid the biggest buyout boom in history, when firms including Blackstone Group LP and Och-Ziff Capital Management Group raised their profiles through public stock listings. While the House of Representatives approved the tax change that year, the measure wasn’t taken up by the Senate.

“Obama and his team are up for a fight here,” said George Teixeira, a managing director with accounting firm RSM McGladrey in New York. “They’re missing key components of what these industries do.”

The change could hurt funds’ abilities to hire and retain managers, Teixeira said. The majority of pay at hedge funds and private-equity firms is drawn from their share of clients’ profits, typically 20 percent of the gains.

“If they have an incentive to give, they can keep their talent,” he said. “If that’s not there, it’s going to be tough to keep people.”

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