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January 7, 2019

Tax Opportunity Pays Huge Dividends for Venture Capital Firm

Client Profile

Industry: Venture Capital
Geographic Footprint Offices in Boston & San Francisco
Fund Ownership Structure Limited Partnership
Size of Fund $1.9 billion

Accountants working on computersIssue

A venture capital (VC) firm sold an investment in one of its portfolio companies, and the transaction produced significant capital gains for income tax purposes. Capital gains tax liability passed through to the VC firm’s general partners and external investors, who found themselves with hefty income tax obligations as a result of their allocation of the transaction’s capital gains income.

Solution

After reviewing the preliminary facts of the transaction, our team identified a potential partial exclusion for gain from certain small business stock opportunity within IRC Section 1202. We discussed the Section 1202 opportunity with the VC firm’s management team and were asked to explore whether the investment in the portfolio company met the Section 1202 definition of a qualified small business stock.

Upon confirming that the transaction qualified, we modeled the gain exclusion for the VC firm’s external investors and internal GP members. We presented our analysis to members of the VC firm’s management team and answered questions about the impact of the gain exclusion on personal income taxes. Our team also answered questions related to reporting the exclusion on income tax filings.

Outcome

The income tax savings was reported at the investor level, but our analysis supported the conclusion that a total of $20 million in capital gain income qualified for the Section 1202 gain exclusion.

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Copyright © 2019, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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