Sign up  |  Log in

leveraged recapitalization

“From a tax perspective, the owner is typically taxed currently on the cash received. If structured properly, a tax deferral is achieved on the stock rolled over into the newly capitalized company. This strategy should be especially appealing to business owners who are considering cashing out in the near future and are domiciled in jurisdictions where tax rates are either scheduled to increase in the near future (such as Japan, at the time of writing) or viewed as likely to increase in the near future (such as the United States, at the time of writing).”

Why leveraged recapitalization is especially appealing where tax rates are scheduled to increase rather than decrease? If tax rates are scheduled to increase, business owner should sell his business outright to avoid future increase in tax rate, rather than defer to sell his remaining shares which will be subject to higher tax rate. 

Available Live or Online, our classes are taught by CFA® charterholders that have a history of helping candidates pass. Take your studies seriously with a live class from Schweser.

I’m no tax expert here and I’ve long forgotten my L3 material, but just taking a stab in the dark here, it could be to increase the business interest expense which then it receives a tax benefit from???

What do you mean by business interest expense?

If I remember correctly, curriculum explained CR strategy with respect to the seller therefore more important would be the capital gains tax especially when the cost base is very low. Secondly CR is a two staged exit strategy wherein Seller sells majority stake in anticipation of higher future capital gains tax and to keep himself away from day to day managment of the company. But retains minority stake becasue of his closeness to the business that keeps him to look at the company even as a minority shareholder and in anticipation that new PE Investor will inject growth capital that will translate into higher share price that translates into higher after tax gains.       

lizihengtotti wrote:
Why leveraged recapitalization is especially appealing where tax rates are scheduled to increase rather than decrease?

Because:

lizihengtotti wrote:
“From a tax perspective, the owner is typically taxed currently on the cash received.

And, from the previous paragraph in the curriculum:

“The owner transfers a portion of her stock for cash … .”

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/