Taxation of Carry Dollars at Work

Sillad's picture
Rank: Chimp | 11

I am a senior investor at a mid market PE fund.

Part of my compensation is "Carry Dollars at Work"

This is fairly common.

Obviously I never paid into the fund as a partner.

How will this income be taxed?

Comments (6)

Most Helpful
Mar 3, 2020

What do you mean by "carry dollars at work"? In my estimation you are referring to one of two things. First, you may have been granted value in the GP as if you had invested. This obviously has no immediate relationship with carry (you are essentially an LP without the fees and the benefit of GP's ownership of carry; you receive returns net of the investment and receive your portion of carry once the hurdle is met ). This would be taxed at capital gains but would likely also have been taxed when the interest was deemed if it holds value at that time. Secondly, I am guessing you may be referring to an award of carried interest. If you are awarded carried interest (or simply rights to a portion of the carried interest value created) then you are also taxed at capital gains rate as returns are achieved and value created. Beware, if your carried interest has a vesting schedule then you are taxed on the total amount of carried interest value, regardless of whether you are vested or unvested. It is important to negotiate tax payments and tax responsibilities at the time of the award. All this being said, I may be misunderstanding your question... haha.

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Mar 3, 2020
  • "carry dollars at work"--the expected return on total carry participation across all
    vehicles, based on achieving a net 2x return (above hurdle and after fees) in a vehicle charging a 20% performancefee. For example, 7 points (700 bps) of carry, out of a possible 100, in a $500 million fund with 20% carry would result in $7 million of carry dollars at work (500 H 0.2 H 0.07 = 7).*

Someone in my firm has been telling me that it is taxed at normal income, but I can't fathom that.

Mar 3, 2020

I would agree that ordinary income treatment doesn't seem right but I have seen crazier things in the world of tax. Probably best to get in front of a tax professional familiar with the PE space. My firm makes our internal tax advisers available to employees for questions like this... perhaps yours would do the same.

Mar 3, 2020

I'll call our guy up as soon as he's done with our taxes this year. Thanks!

Mar 3, 2020

Need to file section 83(b) within 30 days of receiving carry

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Mar 6, 2020
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