Bizjournals: 'Carried interest' tax issue hits heart of VCs

"A proposal to double the rate venture capitalists are taxed on their earnings is not only a major issue in the coming year, but some in the industry contend that it's one of the most important issues faced by the VC industry in a decade.

The proposal to change the tax on profits, commonly called the "carried interest," from capital gains to ordinary income, was passed in a U.S. House of Representatives alternative minimum tax bill earlier this year, but removed from the bill in the U.S. Senate before approval this month.

Industry observers are unsure whether the matter will be revisited during 2008.

The measure would change the treatment of profits from capital gains to ordinary income, increasing the interest rate from 15 percent to as much as 35 percent.

U.S. Rep. Jim Cooper, D-Tenn., said in November the proposal was being dropped because the Senate wouldn't approve it along with the alternative minimum tax. But Rep. Charles Rangel, D-N.Y., has said it would be revisited next year.

Massive earnings by private equity firms such as the Blackstone Group prompted the tax reform and the National Venture Capital Association has objected to VCs being counted among the private equity firms and hedge fund managers.

NVCA president Mark Heesen said the issue is not just about money. The issue would discourage the best and brightest business minds entering the profession and ultimately creating viable, successful businesses, he said. "