Tax Treatment of Profits Interests

One of the goals of a business is to hire and train a team that is passionate about what they’re doing.  Along with a great work environment, one of the ways to motivate them is with profits interest.  Profits interest is an interest in the future profits and appreciation of the assets of a partnership.  This helps workers feel more invested in the success of the company, as they are earning a profit off of it as well.

When a profits interest is initially granted, it is tax-free.  The reason being is that when it is granted, it is not worth anything.  It will only become valuable once the business becomes more valuable.  If the profits interests are held for at least one year after the interests vest, then the amount received is treated as a long-term capital gain.  If it is held for less than a year, then it is considered a short-term gain.

To better understand how it will be taxed, we have to take a look at how capital gains are taxed.  Short-term gains taxes are paid at the same rate as you’d pay on your regular income.  Long-term gains tax rates, on the other hand, are 0 percent, 15 percent, and 20 percent, depending on your income.  These rates are typically much lower than the ordinary income tax rate.

Dealing with taxes may seem intimidating, especially when it involves new areas, such as profits interest.  To help you determine how long you should hold your profits interest, and what you should expect from taxes based on your individual income, you should talk to a cash flow loan CT lawyer.  By doing so, you can feel confident that you’re receiving the best outcome.