Ann Arbor venture capitalists get tax reprieve as 'carried interest' provision dies in U.S. Senate

The provision was attached to a broader bill that would have extended unemployment benefits, but Senate Republicans successfully blocked that bill from moving forward.

"Repealing carried interest is losing appeal as more and more leaders oppose its consequences, unintended or otherwise," tax executive Robert Green wrote for Forbes. "It’s a growth killer in this weak economy and it’s un-American to tax small businesses with ordinary income after their lifetime of hard work to build up their business with risk capital. These entrepreneurs, including investment managers, deserve capital gains when appropriate."

Ann Arbor's venture capitalists argued that the tax increase could discourage prospective investors from funding startup companies and said it would be harder to attract talented people to join the industry.

“It could drive people out of the business,” said Tim Petersen, managing director of Ann Arbor-based Arboretum Ventures, earlier this month. “It’s the wrong time to be (discouraging) people from doing venture activities.”

But U.S. Rep. Sander Levin, D-Michigan, an active proponent of the tax increase, said in a statement provided to AnnArbor.com earlier this month that venture capitalists don't deserve a tax break.

“Venture capital partners play an important role in managing venture capital investments and to the extent that their own money is at risk, income from investment should be taxed at the capital gains rate," Levin said. "However, the compensation they receive for carrying out their job should be taxed as ordinary income - just as it is for other service providers including corporate executives who receive a considerable portion of their pay in stock options subject, if and when exercised, to ordinary income tax rates.”

Currently, venture capital fund managers receive a portion of the profits reaped from a successful investment in a startup company. But, since it can take five to 10 years for that investment to yield profits, that income was historically taxed at the 15 percent capital gains rate.

The "carried interest" provision in the American Jobs and Closing Tax Loopholes Act would have altered the tax code to tax those profits as ordinary income, meaning the rate could reach as high as 35 percent.

Contact AnnArbor.com's Nathan Bomey at (734) 623-2587 or nathanbomey@annarbor.com. You can also follow him on Twitter or subscribe to AnnArbor.com's newsletters.