Carried interest

In most private equity funds, the fund grants the fund manager a set percentage of the net gains as a management fee. The investors' money "carries" the manager, so the manager's interest in any gains is known as the "carried interest." The manager's return on the carried interest is taxed as a capital gain. But many believe that the carried interest is more properly viewed as payment for services, like compensation, so should be taxed as ordinary income. The tax rate on carried interest is usually 15 percent; if it were ordinary income, the rate would be as high as 35 percent.