Venture Capital Tax Roundtable Recap

The Biden Administration’s announced tax proposals are expected to impact venture capital managers. A recent EisnerAmper-hosted virtual “Venture Capital Tax Roundtable” educated venture capital managers on navigating the announced tax policies and legislation which will impact these alternative investment firms. (See also, What to Expect Under the Biden/Harris Administration or Changes, Issues and Challenges for Venture Capital and Hedge Funds Under the Biden/Harris Administration)

Panelists shared a policy update on the recent Biden Administration tax proposals.

• Lindsey Layman, Senior Manager, EisnerAmper (moderator)
• Jon Brose, Partner, Seward & Kissel LLP
• Irina Kimelfeld, Tax Partner, EisnerAmper

The following topics were discussed:

Corporate and Individual Tax Rates Proposals

The fates of the individual and corporate tax rates stood at the forefront of the panelists’ discussion. Both experts agreed the Biden Administration is working on a proposal that would shift the corporate tax rate from 21% to 28%, and the highest individual rate to 39.6%.

Additional proposed changes include an increase in the capital gains tax to ordinary rates for individuals with an adjusted gross income (AGI) over $1 million. While most rate increases are expected to be effective prospectively, the panelists noted that the effective date of the capital gain rate increase is proposed to be the date of announcement. While not entirely clear, date of announcement could refer to the date when Biden Administration announced its American Families Plan, which was April 28, 2021, making the capital gains rate increase retroactive. These changes and more are expected to pay for the ultimate spending package with the proposed price tag of $4 trillion. The Biden Administration’s proposals in the American Jobs Plan are captured in the proposed infrastructure bill but on a much smaller scale. Remaining proposals from the American Jobs Plan that were not included in the infrastructure bill and the Administration’s proposals from the American Families Plan will become part of the budget reconciliation process.

President Biden has suggested that the infrastructure bill and the budget are tied and that he would not sign one without the other. The infrastructure bill will provide funding for roads, bridges, rail, transit, water, and other physical infrastructure programs. The budget proposal is expected to finance remaining programs on the Administration’s agenda.

Carried Interest Proposals

The panelists also touched on proposed changes to carried interest, which has been a hot topic for fund managers across all industries (see also, Final Regulations Issued on Treatment of Carried Interest). In 2017, the Tax Cuts and Jobs Act (TCJA) introduced IRC Sec. 1061, which effectively increased the holding period for long-term gain recognition on carried interest from one year to three. The Administration’s proposal aims to tax all carried interest at ordinary rates.

Panelists also discussed a separate bill introduced in the House of Representatives on the topic that eliminates the IRC Sec. 1202 exclusion (qualified small business stock) for carried interest recipients. It is not entirely clear if the exclusion applies in the first place, but changes to treatment of carried interest are likely to include changes to the IRC Sec. 1202 exclusion. Panelists have commented on the interplay of the proposed increase in capital gains rates and the carried interest proposals.

Minimum Global Tax Regime Proposals

International tax compliance was also a topic of discussion. The global tax regime proposal calls for a minimum tax on book income and a minimum global tax rate. A minimum global tax rate would require cooperation and coordination with many different countries, especially those that are further developed with large economies. One key goal of this legislation is to develop a minimum rate so taxpayers are not eroding the tax base by shifting operations to tax haven countries. The expectation is that these proposals will initially only apply to large multinational corporations

When facing periods of rising tax rates, the common tax wisdom of deferring income and accelerating expenses is turned around, and taxpayers should consider accelerating income and gain transactions, keeping in mind that any capital gain rate increases may already be locked in with an uncertain effective date. However, much uncertainty still remains behind which elements of the proposals will ultimately become law, making planning challenging.