'Step-up in basis' top GPs’ tax concerns

When asked which tax issues are most important during the acquisition process, most fund managers cited the ability to readjust a company’s value post-acquisition as a way of maximising certain tax advantages, according to McGladrey’s 2012 private equity survey. 

Two-thirds of respondents consider this “step-up in basis” as very or extremely important, according to the survey, while a similar percentage of firms (64 percent) cited the deductibility of interest payments as a crucial tax consideration when buying a target company.  

In the context of private equity, a step-up refers to the practice of a firm bringing the basis of the acquired company’s assets up to its current fair market value. By doing so, portfolio companies are able to better benefit from certain tax advantages like amortisation or depreciation deductions and amortisation of goodwill, explained Steve Bortnick, a partner in the tax practice group of law firm Pepper Hamilton, in an interview with PE Manager. 

Further down the list of tax priorities, though still considered either very or extremely important by roughly half of respondents, was federal and state income tax exposure. A lesser amount of fund managers cited the deductibility of transactions costs and the ability to bring allowable tax deductions forward as considerably important, according to the survey. 

Perhaps surprisingly, the survey also revealed that only 17 percent of firms feel changes to the tax treatment of carried interest – which Democrats, led by the Obama administration, feel are taxed too generously – will affect their investments and operations. A little under half of respondents (44 percent) said it would have no impact, while the remainder (39 percent) said they were unsure.