Profits Interest (LLC) Tax Calculator 2026 — Rev Proc 93-27 Waterfall
Calculate profits interest grant taxation — zero current income at grant, long-term capital gains at distribution. Model PE/VC/RE sponsor waterfall with hurdle, catch-up and GP/LP split.
%
GP's share of profits (typical: 20%) $
Total LP capital committed %
Total return on fund over holding period %
LP preferred return before GP participates Holding period (>3 years = LTCG under §1061)
%
$0
GP Gross Distribution (Profits Interest)
LTCG
Tax Character
$0
Tax (LTCG 23.8% or Ordinary)
$0
Net After-Tax to GP
Waterfall Summary
| Distribution Tier | Recipient | Amount | Tax Character |
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How Profits Interest Taxation Works
A profits interest is one of the most tax-efficient forms of compensation available to fund managers, real estate sponsors, and private equity professionals. At grant: zero taxable income. At distribution: long-term capital gains (if held >3 years under §1061, or >1 year for non-APII property).
The Waterfall Formula
Total Proceeds = Fund Commitment × (1 + Gross Return%)
Step 1: Return of Capital → LP receives 100% of Fund Commitment
Step 2: Preferred Return → LP receives Commitment × Hurdle% × Years
Step 3: Catch-up → GP receives until GP has 20% of total profit distributions
Step 4: Residual → 80% to LP, 20% (profits interest %) to GP
Tax on GP profits interest = LTCG rate (20% + 3.8% NIIT = 23.8% if >threshold) if held >3 years
Or ordinary income rate if <3 years (§1061 recharacterization)
Step 1: Return of Capital → LP receives 100% of Fund Commitment
Step 2: Preferred Return → LP receives Commitment × Hurdle% × Years
Step 3: Catch-up → GP receives until GP has 20% of total profit distributions
Step 4: Residual → 80% to LP, 20% (profits interest %) to GP
Tax on GP profits interest = LTCG rate (20% + 3.8% NIIT = 23.8% if >threshold) if held >3 years
Or ordinary income rate if <3 years (§1061 recharacterization)
Extended
Capital Account Waterfall Modeler
Full LP/GP distribution waterfall: return of capital → preferred return → catch-up → 80/20 split. Year-by-year table with tax character analysis.
Full capital account waterfall with year-by-year distributions, tax character analysis, and GP vs LP comparison chart.
| Distribution Layer | LP Amount | GP Amount | LP Tax Character | GP Tax Character | GP Tax (§1061) |
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GP vs LP Distribution Chart
Tax Character Summary
| Income Type | GP Amount | GP Rate | GP Tax | GP Net |
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Frequently Asked Questions
What is a profits interest and why is it tax-free at grant?
A profits interest (also called a "carried interest" or "promote") is a grant of a right to future profits and appreciation of an LLC or partnership — but not its current value. Under Rev. Proc. 93-27 and 2001-43, a profits interest received for services is not taxable at grant if: (1) it is not a capital interest (the holder would receive nothing if the partnership liquidated immediately), and (2) it is not sold within 2 years of grant. This makes profits interests extremely tax-efficient compared to compensatory stock grants, where the grant-date value is immediately taxable.
How are profits interest distributions taxed when received?
When the LLC distributes profits to a profits interest holder, the character of income flows through from the entity. If the fund generates long-term capital gains (from asset sales held > 1 year), those flow through to the profits interest holder as long-term capital gains, taxed at 0%, 15%, or 20% (plus 3.8% NIIT for higher earners = 23.8% max). Ordinary income items (dividends, short-term gains, management fee income) flow through as ordinary income. Return of capital is tax-free. This is fundamentally different from a salary or bonus.
Should I file an §83(b) election on a profits interest?
Technically, a profits interest at grant has zero value (by definition under Rev. Proc. 93-27), so an §83(b) election has no immediate tax consequence. However, many practitioners still file §83(b) elections within 30 days of grant as a defensive measure — it starts the clock on long-term holding periods for future appreciation, protects against IRS recharacterization, and ensures any unexpected value at grant is locked in at the current zero. Missing the 30-day window means no §83(b) is possible, and vesting events could be recharacterized as compensation.
What is a hurdle rate and catch-up in a profits interest structure?
A hurdle rate (preferred return) is a minimum return the LPs must first receive before the GP/profits interest holder shares in profits. Common hurdle: 8% IRR on invested capital. Once LPs receive their preferred return, the catch-up provision allows the GP to "catch up" and receive a disproportionate share of distributions until the GP has received its target percentage (e.g., 20%) of total profits. A 100% catch-up means the GP gets 100% of distributions until caught up; a 50% catch-up is slower.
How does §1061 affect carried interest taxation?
§1061 (enacted in the 2017 Tax Cuts and Jobs Act) requires a 3-year holding period (instead of 1 year) for carried interest / profits interest income to qualify for long-term capital gains rates. If the underlying assets are held less than 3 years, the carried interest gain is recharacterized as short-term capital gain, taxed at ordinary income rates (up to 37%). This primarily affects PE and hedge fund managers who sell portfolio companies within 3 years. The 3-year rule applies to the partnership interest holder, not just the underlying assets.