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Tax Reform and Private Equity: Protecting Access to Capital


5/28/13

Access to capital is a critical factor in the financial health of small and medium-sized businesses. When businesses are financially healthy, they create jobs and help to grow the economy. In today’s economic environment, affordable capital is difficult to find as traditional sources of capital, such as banks, often avoid the lending risk associated with small and medium-sized businesses. Private equity, on the other hand, embraces the opportunity to fund growing companies.
 
CohnReznick favors targeted tax reform that helps small and medium-sized businesses gain access to capital. We support provisions that recognize the importance that private equity has in job creation and economic growth. Accordingly, we applaud the efforts of the Small Business Investor Alliance (SBIA) for submitting public comments on tax reform to the House Ways and Means Committee’s working groups. These comments explain how tax provisions impact the future strength and vitality of the private equity industry.
 
What Does CohnReznick Support?
 
In the current environment, the tax cost of doing business is high. Tax rates, including income tax, capital gains tax and the net investment income tax, are increasing. For private equity investors, this tax cost significantly limits the amount of capital that private equity groups have to provide to small and middle-sized businesses.
 
CohnReznick supports targeted tax reform that encourages private capital investment. We endorse a number of provisions in both the White House budget proposal and the House Ways and Means discussion draft including:

  • Expanding and making permanent the research and experimentation tax credit. A strengthened credit can improve investors’ yield on otherwise risky investments.
  • Reducing the required holding period from 5 years to 3 years for a 100 percent exclusion from gross income of gain realized from qualified small business (QSB) stock. This proposal also simplifies the definition of QSB stock, making the category more inclusive.
  • Repealing the “anti-churning” provisions related to amortization of intangibles. These rules are complex and create a heavy administrative burden that outweighs the need for the provision.
  • Expanding the ability to expense depreciable property. This expansion would not only allow for stable business planning, it would reduce the after-tax cost of capital assets. This, in turn, encourages investment activity.
     

CohnReznick also urges that tax reform should be approached with caution. In particular, the following proposals bear cause for concern:

  • While the interest expense deduction is a vital component of the economic health of the private equity industry, some reform proposals suggest that this deduction should be limited or denied for investments that represent “credit risks.” We believe that such a proposal would greatly harm the ability of private investors to invest in small and mid-sized business and negatively impact the economy in general. Any proposal related to interest expense deductions should be carefully tailored to avoid causing a negative domino effect.
  • Congress received commentary representing a variety of perspectives on the taxation of carried interest. We encourage Congress to examine this issue beyond the context of private equity groups and hedge funds. Carried interest taxation can impact businesses of all sizes and types that are considering expansion. Thoughtful tax reform should take this impact into account and reflect the diverse use of carried interest.
     

As Congress’ view on reform evolves, CohnReznick will continue to provide updates and guidance on tax reform and the impact on your ability to provide and obtain capital. Click here if you missed CohnReznick’s summary of the American Taxpayer Relief Act and its impact on private equity taxpayers.


What Does CohnReznick Think?
Many participants in the tax reform process have urged tax reform proposals to make the tax code simpler and more stable. CohnReznick supports targeted tax reform that takes into account the ways that businesses operate in the real world. We support market-conscious reform proposals that recognize the importance of private equity investment in growing small and medium-sized businesses.
 
Tax reform should focus on helping small and medium-sized businesses gain greater access to capital. However, it must also be structured to reduce the costs of complying with legal and reporting requirements. Tax reform that leads to capital formation while helping to protect the financial health of growth businesses and their private equity investors will encourage a healthy economy. Investment-friendly tax rates on capital gains, expanded business-friendly tax credits and deductions, and similar provisions will accomplish these goals.


Contact:
 
For more information on tax reform and its impact on the private equity industry, please contact:
 
Dom Esposito, Private Equity and Venture Capital Industry - National Director, at 646-254-7414;
Jeremy Swan, Principal, at 646-625-5716.
 
For information on CohnReznick’s Private Equity and Venture Capital Industry practice, visit our webpage.


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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