Working For Promotes Or Compensatory Shares To Reduce Taxes

[Bryan Hancock]

We're doing some planning for next year for taxes and what is becoming increasingly clear is how stupid our tax system is.  Projects we set up as syndications where we're contributing both labor and capital can be structured with "promotes" to define how we'll be compensated.  This only works if you can take the profits in this manner and don't need access to the capital in the short-run to keep the lights on.  

Our funds, in theory, would also allow service providers of ours to take their fees as compensatory shares and "ride along in the deal" where they can take profits at the end of the project and convert their taxes from ordinary income to long-term capital gains.  

Based on our range of possible incomes I did the math last night and the difference in taxes is 7% on the lower bound and as much as 24.6% on the upper bound.  That is quite a huge difference.  Even at 7% difference we would err on the side of taking deferred compensation since taxes are by far our largest expense.  

This begs the question about how developers or other investors view their cash position with respect to taxes.  If you have ample cash reserves you can afford to take your profits as carry or a promote and thus save a ton in taxes.  If you, instead, do what most investors do and deploy the cash the fempto-second you get it because it "is not working" or is "idle" and you'd lose money in real terms through inflation erosion you'd lose the ability to defer profits and they'd be taxed at the higher rate.   

Does anyone have any comments on this or have a method for balancing keeping cash at work and getting favorable tax treatment?