The New York City Department of Finance is backing off a proposed policy change that would have increased the tax liability of hedge funds and private equity firms, according to an article published by Tax Analysts.
The city currently levies an unincorporated business tax of 4 percent on management fees collected by private investment firms, but considers income from carried interest to be exempt from the UBT. Hedge funds, meanwhile, typically structure their businesses as two legal entities: One that performs management services and collects management fees, and another that owns carries interest.
Tax Analysts says that the city never planned to apply the UBT to carried interest—but considered a plan to achieve a similar effect by introducing an audit program that would have prevented investment firms from claiming a disproportionate share of expenses against the part of its corporate structure that pays the tax:
Specifically, the department was preparing to assert a position that would shift expenses from the investment management entity to the entity that receives the carried interest. That shifting of expenses would have increased the investment management entity’s UBT liability because the entity would have fewer expenses to deduct.
The mayor’s office asked the Department of Finance to drop the new position, according to Tax Analysts. The city had started some audits under the guidelines of its new position, but is not believed to have issued any new tax bills under the program.