Changes, Issues, and Challenges for Venture Capital and Hedge Funds Under the Biden/Harris Administration

Under the Biden/Harris administration, tax reform is expected which will impact the hedge fund and venture capital industry. EisnerAmper held a series of virtual roundtables for emerging hedge fund and venture capital managers to discuss the potential changes.  The venture capital tax roundtable was held on Tuesday, February 23, and featured EisnerAmper Partner Kayla Konovitch and Reitler Kailas & Rosenblatt Partner Richard Martinson. The hedge fund tax roundtable followed, on Thursday, February 25 and featured EisnerAmper Tax Manager Alex Turk, and Shartsis Friese Partner Kevin Leiske.  Both sessions were moderated by Katie Brandtjen, Head of EisnerAmper’s West Coast Tax Practice. 

The following topics were discussed:

Tax Changes

During both sessions, panelists agreed there would be a shift in the corporate tax rate from 21% to 28%, still below the 35% rate that was the maximum before the 2017 Tax Cuts and Jobs Act. Additionally, both sessions discussed the likely increase in the maximum individual tax rate to 39.6% with the added threat of an increased long-term capital gains tax rate to the same level for those with a reported income of over $1,000,000. All panelists agreed the Biden/Harris administration is currently focused on the COVID-19 relief package so any tax changes are likely to take a backseat in the short-term.

Employer Retention Credit

Changes specifically for venture capital include an increase in the Employer Retention Credit (ERC), which is a credit that can help portfolio companies with cash flow issues during the pandemic. A company with less than 500 employees can get up to a 70% credit per employee, if either of the following criteria were met in either Q1 or Q2 2020: operations were either partially or fully suspended due to COVID-19; or there was a significant decline in gross receipts versus the same period of 2019.

Exclusion of Gains on Qualified Small Business Stock (QSBS)

Another hot topic from the venture capital discussion centered around IRC Sec. 1202 exclusion of gain on qualified small business stock. There is tremendous interest in this provision with a trend for proactive structuring and engineering in private equity and venture capital to maximize on the QSBS exclusion of gain. Given the Biden administration has been discussing the likelihood of a tax increase, this exclusion provision may be all the more beneficial to taxpayers. While there hasn’t been any indication in Biden’s plan to curtail this provision, it is certainly worthwhile to strategize in ways to continue utilizing this provision to maximize tax savings and return on investment.

Digital Assets

During the hedge fund roundtable, the panelists discussed the emergence of digital assets led by bitcoin as an institutional grade asset. The IRS has not yet taken a position on several key crypto talking points including how the staking of a coin is taxed. The space was referred to as the “wild west” of the investment space.

Carried Interest Regulations

The panelists on the hedge fund roundtable spent some time discussing the new carried interest regulations under IRC Sec. 1061 which has been a hot topic for fund managers earning carry that might be required to reclassify what otherwise would be long term capital gain as short term capital gains. The discussion revolved around the treatment of carry earned on unrealized, reinvested capital, and carry that had been realized and previously subject to reclassification.

If you have a topic you would like to explore during a future roundtable, please contact Eugene Tetlow.