December 9, 2013
Interviewed by: David Snow
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Top Tax Trends – in Two Minutes

Top tax trends in private equity from a leading tax expert–in two minutes! In this episode: ObamaCare’s “play or pay” decision, “small qualified business stock” exemptions, and comprehensive tax reform.

Top tax trends in private equity from a leading tax expert–in two minutes! In this episode: ObamaCare’s “play or pay” decision, “small qualified business stock” exemptions, and comprehensive tax reform.

Top Tax Trends in Two Minutes With Rick Bailine of RSM

Tax Trend 1: The Affordable Care Act ‘Play or Pay’ Decision Which Should Portfolio Companies Choose?

Bailine: I have not seen any single topic generate as much interest in the business community in the 30 plus years I’ve been doing this as the Affordable Care Act. So, Obamacare, as it’s affectionately called by most folks, and the pay or play decision is one that employers have to make a decision. Am I going to pay, meaning am I going to decide not to have my employees covered by the Affordable Care Act, or am I going to play? Meaning I will make a decision to have my employees covered by the Affordable Care Act. That for a business is really a financial decision. If you decide to pay meaning you may decide not to put your employees into Obamacare you’re going to have to pay fines. And the fines we all know according to the Supreme Court they’re not fines, they’re taxes. It’s just the way the IRS or the government is extracting an additionaltax.

Now the good news is the decision was put off, it was supposed to take effect January 1st of 2014, but as I’m sure we’ve all learned over the last few months with all the publicity the Affordable Care Act is now receiving the employer, the so called employer mandate, which is where this props up, has been deferred for one year to 1/1/15. But frankly, now is the time to start looking at this. You don’t want to be looking at this next year when you only have a very brief window of time to make a decision.

Tax Trend 2: Looming deadline for Section 1202 “qualified small business stock” tax exemption

Bailine: Section 1202 will allow the seller of the stock, the private equity company, if they’ve held the stock for a period of five years or more, to pay zero capital gain on the sale. So if they put $20 million in and they sell it for $80 gain they’ve had if they’ve had the stock for the five-­‐year period can be 100% free of tax. Unfortunately that code section is going to sunset on December 31st.

It actually sun set in 2012 and under the taxpayer relief act of 2012 they extended it for 2013. So if you have a mind to call your, your congressman see if they can get it extended for 2014 as well.

Tax Trend 3: Comprehensive Tax Reform not necessarily good for private equity

Bailine: Everyone tends to think that comprehensive tax reform will benefit them. Invariably, if you ask folks are you in favor of comprehensive tax reform they all say yes, and the reason they say that is because most of us believe we pay too much taxes and the other guy doesn’t pay enough, and that will be readily available in tax reform. The biggest issue I think private equity faces with potential comprehensive tax reform is both sides of the aisle democrats and republicans alike are talking about reducing the corporate tax rate from it’s current down to about 28%. But they also say the way they would pay for that would be by closing certain loopholes and deductions that corporations are allowed to take.

The good news as it applies to a C corporation, they’re getting a tax break along with that, along with the ability to not to make that deduction they’re getting a reduced tax rate so they come out even. But if you’re a partnership or an S corporation, your deductions go down but your tax rate has stayed the same. So if you’re deduction goes down and your tax rate stays the same, you’re paying more taxes.

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