Senate Still Struggling Over Tax Extenders

by Mike Godfrey, Tax-News.com, Washington

21 June 2010

The US Senate Finance Committee has put forward a new version of the American Jobs and Closing Tax Loopholes Bill of 2010 after the Senate itself refused to pass a previous version of the Bill which had watered down many of the provisions of the equivalent House legislation passed at the beginning of the month.

In the rejected version of the Bill, the Finance Committee had proposed decreasing the proportion of carried interest (the share of investment fund profits that accrues to the managers of the fund, and in the US is currently taxed as capital gains at 15%) that is to be recharacterized as ordinary income from 75% to 65%, and to increase the amount treated as capital gains from 25% to 35% in taxable years beginning after December 12, 2012. Assets held for more than seven years would have been even less harshly treated. But this proved too much for Senate Democrats to swallow.

In the new, revised proposition from the Committee, 75% of fund managers' income would be taxed at regular tax rates, with more favourable treatment reserved for 50% of income derived from assets held at least 5 years.

Senate Finance Committee Chairman Max Baucus said that the new version of the Bill was less costly than the previous one, since several spending measures had been cut back or expunged, and that the new carried interest rules would pay for more than half of the cost of extension of the tax breaks still contained in the Bill. In his opinion, the new version should be able to get through the full Senate. But it will still provoke howls of pain from the fund management industry.

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