Tax on Carry/Promote Interest
This may seem like a dumb question now given the current state of our market but I was wondering if anyone who has been granted Carry/Promote equity interest from their firm could give a quick TLDR on how its structured, taxed, and paid out once realized.
Do employees who are granted a piece receive the same capital gains tax benefit if the dollars are eligible for it, or is it viewed as ordinary income for you and capital gains for the firm? Do you need to structure the promote entities a certain way? Are there specific tax forms that need to be filed? Can you defer the pay out and have it rolled into a new deal, similar to a 1031? Does it differ between traditional PE and REPE?
Just trying to get a general sense of how it’s structured at most shops and what options employees have that may be different than what the principals receive.
Bump
I’m not and expert but think most shops give you a tracking interest, which is essentially a bonus and taxed as ordinary income. I believe if you are an actual investor in the sponsor entity (in the management docs) then you would get the tax benefit, but your also in the hook for actually investing your portion of money along with potential capital calls.
This is how it generally works. But, with that being said, you have to look at the specific fund. There are a lot of more nuanced ways of doing it and there are a bunch of alternatives
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