Hi Guys,
So I have been told by a lawyer that promote is not tax deductible for investors. I.e, investors should pay tax on the profits of the pre promote cashflow, not the profits of the net cashflow post promote.
This threw me back as I have always seen investors taxed on the net cashflow post promote. Am I being crazy here or is the lawyer wrong?
This is for a UK deal.
| +43 | What should we be buying? | 28 | 5h |
| +30 | Uncertain of what To Do Next | 5 | 3d |
| +28 | Capital Restricted Developer | 2 | 4d |
| +28 | Where are free agents signing? | 8 | 9h |
| +26 | Laughable Job Posting | 5 | 4h |
| +23 | Warning: J. Shaw Recruiters | 5 | 3d |
| +8 | Development Budget: use RENTABLE or GROSS BUILDABLE sf? | 3 | 7h |
| +6 | First-year REPE analyst comp check (London) | 1 | 5d |
| +4 | Vandy MSF or NYU MSRE | 4 | 3d |
| +4 | Shops with largest intern classes | 5 | 3d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
I'd go with your lawyer's advice assuming their background is tax. I have seen it as tax deductible on some deals, but this is where the investor was 100% of the equity and the promote was a performance fee paid to the development manager subject to achieving an IRR hurdle. If the promote was structured as a cashflow / gain accruing to different share classes (assuming says 95% class A / 5% class B JV) I can see rationale for how it wouldn't be tax deductible. There's several ways to structure a promote, so I'd always go with the advice of a tax consultant on it (assuming they're qualified to advise on it).
Interesting. It makes sense in your case where 100% one equity partner paying out promote to another party which is an expense. Although I am not a tax accountant or a tax lawyer, paying taxes on pre promote CF and then paying taxes on promote - isn't that double taxation? I might be wrong, been wrong before..
Should the promote not be calculated on the basis of net returns after all income and corporate gain taxes have been paid?
Again I might be wrong, but in my experience: net cash flow (NCF) is distributed to LP/GP/ownership - then everyone pays taxes based on their tax situation. We usually had big4 do the cals out of capital account for distributions and tax accounting for all GP/LP/ownership
Agreed, this is how I was shown to always do it. Promote would be calculated on the gross cashflow to investors, after calculating the promote one then normally calculates the tax liability (at least in my case, given the LP's in our deals provide 100% of the capital).
Et fuga culpa libero sint sed. Quisquam dolores porro velit tenetur. Aliquam provident ut occaecati eius distinctio omnis. Nostrum nesciunt earum velit magnam numquam quia ea dolores. Eum accusamus beatae deserunt et. Quo quidem vero voluptas.
Totam quos cum officia totam. Veritatis blanditiis eveniet mollitia natus illum.
Sed tempora voluptatum deserunt enim aliquid. Accusantium ut ut et excepturi voluptas. Ut quam sit culpa provident omnis quis soluta qui. Vel corrupti id fugiat voluptatibus. Mollitia voluptas praesentium explicabo voluptatem vitae enim veritatis. Dolor deleniti labore dolores omnis aliquid.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...