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New Jersey Considers Legislation to End Carried Interest Preferential Tax Treatment


Synopsis
 
New Jersey recently introduced legislation that would eliminate the preferential tax treatment available to owners of carried interest. This legislation would: (1) make carried interest income subject to both personal and corporate income tax; and, (2) impose a 19% surtax on such income.
 
Issue
 
Currently, upon formation of a private equity fund, which generally is organized as a partnership or limited liability company, the fund manager, in addition to receiving current compensation of about 2% of the assets under management, is granted an interest in the future profits of the fund as compensation for management services provided to the fund. That interest in the future profits of the fund (typically 20% of profits) is referred to as carried interest.
 
Under current federal and New Jersey tax law, the future income typically generated by a fund is treated as long-term capital gains subject to preferential tax rates, currently 15%. As such, a fund manager who is allocated income from a fund on the basis of carried interest, typically, transforms income from compensation for services which is typically subject to ordinary income tax rates, into capital gains subject to preferential long-term capital gains tax rates.
 
New Jersey recently introduced legislation A-3868 that would impose both a corporate business tax and a gross income tax on income attributable to certain investment management services provided by a partner to a partnership. The legislation would explicitly define investment management services income, so as to capture carried interest. Further, the legislation would impose a 19% surtax as a “carried interest fairness fee.”  
 
If enacted, the legislation will not take effect until the nearby states of Connecticut, New York and Massachusetts have enacted similar legislation.
 
What Does CohnReznick Think?
 
The income tax treatment of carried interest has long been a topic of debate at the federal level. Due to the political issues surrounding the preferential tax treatment afforded this income, as well as the budget pressures the states are facing, this debate has found its way to the state level.  
Since New Jersey has tied the effective date of the legislation to the legislative actions from other states, it is unclear whether this rule will ever become effective.
 
Contact
 
For more information, please contact Harry Golematis, Director, State and Local Tax Services, at harry.golematis@cohnreznick.com or 973-364-7891 or Eddie Delgado, Partner, State and Local Tax Services, at eddie.delgado@cohnreznick.com or 310-843-8246.
 
 
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
 
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