Venture's Taxing Problem

28 May 2010 - The U.S. House of Representatives on Friday agreed to increase taxes on venture and private equity firms in what is arguably the most widely watched congressional bill among Silicon Valley investors.

Dubbed the American Jobs and Closing Tax Loopholes Act of 2010 (HR 4213), the bill now moves to the Senate, which plans to return to the matter after Memorial Day.

What's at stake is raising taxation on profits from investments. General partners at venture capital firms and buyout funds typically garner 20 percent of the profits, known as carried interest, on investments under management. Under current tax law, carried interest is taxed at a capital gains rate of 15 percent as opposed to the roughly 35 percent paid for ordinary income tax.

Critics of Wall Street's wealthy fund managers would like to see these investors pay what the average person pays in taxes on the money they earn.

The legislation "will more than double the taxes that long term investors pay when they build successful companies and create jobs," National Venture Capital Association President Mark Heesen said in a statement.

What the tax bill proposes is to treat 75 percent of that profit, or carried interest, as income tax while the remaining 25 percent would get taxed at the capital gains rate.

Venture capital firms argue that they are rewarded for high-risk, long term investments in companies that create jobs. A group of U.S. academic institutions and researchers this week urged President Obama to consider those points, arguing that new products and medicines would not be developed without the work of venture capital firms.

"Jobs will be lost and our country's innovations will wither on the vine," wrote the group that included MIT, Dartmouth, Harvard, UCSD, Arizona Technology Enterprises, University of Washington, University of Michigan Medical School, Institute for Systems Biology, UCLA, Tufts, Stanford University, MGH Cancer Center, and the University of Chicago Medical Center.