Preserving carry tax treatment and other ACG policy priorities for 2016

  • Wants to maintain the “joint employer” legal standard for mid-sized companies
  • Aims to preserve the capital-gains tax treatment for carried interest
  • Wants to maintain the deductibility of interest on corporate debt

With New Year’s resolutions in the books, now is the time to start making good on them.

Gary LaBranche, president and CEO of the Association for Corporate Growth, and Amber Landis, ACG’s vice president of public policy, recently spoke with Buyouts about their goals for the new year. ACG has grown to more than 14,500 members, including more than 1,000 mid-market buyout firms, operating in 57 chapters around the world.

ACG has four public policy priorities for 2016:

1. Maintain the “joint employer” legal standard for mid-sized companies.

Recent actions by the National Labor Relations Board have undermined a legal standard in which companies have been considered “joint employers” only in cases where they directly control another company’s employees. The standard has protected organizations, including private equity firms, from liability related to employee actions taken by suppliers, vendors, contractors, portfolio companies and other third parties.

In one of its recent actions, NLRB just over a year ago filed complaints against McDonald’s USA related to employee activity at franchise restaurants not owned by McDonald’s.

LaBranche said the threat of a presidential veto effectively killed a legislative fix tentatively attached as a rider to last year’s omnibus spending bill. Nevertheless, he said that “there’s quite a bit of support — bi-partisan support — to clarify this situation.” Getting legislation passed remains a priority for this year.

2. Preserve the capital-gains tax treatment for carried interest.

Every year, it seems, U.S. legislators threaten to switch the tax treatment of carried interest from capital gains to regular income. And every year, the industry reacts, rightly or wrongly, as if it is an existential threat. So far, the proposals have gone nowhere. This year you can expect more of the same.

The next session of Congress, said LaBranche, will be “consumed” with presidential politics. “As a result of that, very little will be accomplished on something as significant as comprehensive tax reform.” He sees “no reasonable scenario” in which a proposal would make it out of both houses of Congress.

That said, ACG believes carried interest taxation will “continue to be a major issue” and could return to the table as part of future comprehensive tax reform. For that reason ACG plans to keep up the pressure, telling legislators and their staffs why treating carried interest as capital gains is appropriate and in keeping with the partnership model of corporate ownership.

3. Maintain the deductibility of interest on corporate debt.

Leverage plays such a big role in generating PE returns that eliminating the deductibility of interest — a proposal floated by Republican presidential candidate Marco Rubio  could pose an existential threat to the business. That the effects would be so spectacular works in the industry’s favor.

Do legislatures really want to turn off the spigot governing the flow of growth capital to thousands of mid-sized companies that in turn employ tens of thousands of people?

As with carried interest taxation, LaBranche sees little chance of legislation passing this year. However, he predicted “that no matter who is elected, come the following session of congress there is a high likelihood that interest deductibility will be very high on the agenda.”

LaBranche said ACG staff would talk with legislators this year about how eliminating the deductibility of interest represents a “direct threat to the viability of a small company that has a need to borrow to expand their company.”

4. To be announced.

And the fourth priority? ACG doesn’t want to give a way too many details yet. But Landis did say that “the Investment Advisers Act [of 1940] is ill-fitting for the middle-market private equity community and we look forward to talk about how we can modernize the compliance regime for ACG members.”

Stay tuned for more details to be revealed at ACG’s annual public policy summit in Washington later in January.

Action Item: Learn more about the public policy summit here:

Regulation concept photo courtesy of ShutterStock