Carried Interest Could Be Impacted by Blue Wave

A recent news article from The Wall Street Journal stated that in an effort to increase the prestige of partnership, Goldman Sachs is expected to name fewer partners this year. However, for those named to partnership, part of the deal may be new access to carried interest from its exclusive private investment funds, along with access to loans up to $500K to increase their commitment size. The consensus is a Democratic presidential and legislative victory could make this new partner perk less attractive than under the current tax code.  

If U.S. President Donald Trump is reelected, it is expected there would be no changes to the Tax Cuts and Jobs Acts he signed in December 2017, which continued long-standing favorable tax treatment for long-term capital gains. Generally, carried interest may be taxed at the long-term capital gains rate of 20% as opposed to the regular income tax rate. While the Tax cuts and Jobs Act added an additional hurdle to obtaining such favorable long-term capital gains rate for most holders of carried interest, the ability for favorable tax treatment is still there.

If Joe Biden wins and both houses of Congress end up with a Democratic majority, his proposed tax plan is more likely to become law. Biden’s proposed tax changes do not directly comment on eliminating the capital gains treatment for carried interest. However, it proposes an end to the long-term capital gains tax rate for people who earn more than $1 million per year. Goldman Sachs partners earn a minimum annual salary of $1 million.

EisnerAmper said if there is a ‘blue wave’ that also flips Senate control to Democrats, Biden’s proposal on eliminating capital gains tax treatment for people making more than $1 million a year makes the carried interest sweetener to the partnership deal marginally less attractive. She added that even so, these funds will still provide new partners with access to great investment opportunities.

She added: “Making loans to new partners for the purpose of investing in its own vehicles is also beneficial to Goldman Sachs because 1) the bank will earn interest on those loans and 2) it is an efficient way to raise capital without having to pay someone to do so, use its own balance sheet and/or use leverage. It is also unclear what management fees the partners will pay to the firm, if any. In any case, it is still extremely prestigious to be a Goldman Sachs partner both within the firm and across the industry. It is an impressively high bar and quite an honor and achievement to be selected.”