I was flicking through reading 17 and could not get my head around the following: “Private equity and venture capital generally have favourable tax treatment because the capital gains tend to be long term. In addition certain fees and expenses (eg management fees) may be a deduction against ordinary income. Unless the deferral period is long, however, the savings may not be important, especially because the depreciation must be recaptured at high tax rates.” The last sentence of that doesn’t make sense to me, what are they saying?
I interpreted it as: the savings from the mgmt fees being tax deductible will not outweigh the capital gains tax from the private equity and venture capital investments unless the investment period was long enough for capital gain deferment.
For me, the part confusing is " especially because depreciation must be recaptured at high tax rates" Because capital gain will not be taxed before it is realized, if the period is long, by the compounding returns on the taxes that you did not need to pay, it will bring significant savings. But what do they mean by depreciation recaptured at high tax rates?
I agree that “depreciation recaptured at high tax rates” made very little sense if even, since what is “depreciation” referring to? lower income taxes paid due to mgmt fees? And by “recaptured at high tax rates,” are they talking about the capital gains being realized and taxed if the investment period is too short? Therefore, would the the lower income taxes paid be offset by the higher taxes due to capital gains realized in a short investment period. That’s the way I viewed it - not sure if it makes any sense.
Has anyone compiled a list of end of assigned reading questions yet? looks like a lot of readings do not have any questions at all including reading 17