The math is easy when an investor with eligible capital gains is presented with two investment options that are identical in risk and return, but only one qualifies for opportunity zone (OZ) benefits. But what if the risk and return are not identical? This is where the investment analysis gets tricky. A lack of understanding can cause many investors and advisors to underestimate, or even discard, the potential benefits of the OZ option, and unknowingly choose an investment that offers higher risk or lower after-tax returns.  Here, we outline how to analyze the key components of OZ benefits so you can make an informed reinvestment decision when choosing between an OZ and non-OZ option. OZ investments offer three financial benefits: A deferral on paying the tax on the original capital gain until reported on the 2026 tax return; A discount on the deferred original capital gain when it is reported on the 2026 tax return; and  A step-up in basis upon sale of the new OZ investment once held for 10 years or more.
Assuming no change in the future capital gain tax rate, all of the variables are known when calculating the first two benefits so quantifying and factoring into an internal rate of return (IRR) or return on invested capital (ROIC) is straight-forward. However, the 2026 cap gain tax rate is subject to change, and there are some proposals that may increase it significantly. .   The rate in 2026 ultimately depends on the outcome of three congressional and two presidential election cycles. A change in cap gain rates could have a significant impact on the after-tax return on an OZ investment. Should capital gains rates increase, the deferred tax paid with the 2026 tax return would increase, but the OZ benefit of eliminating gains (including no recapture of depreciation) after the 10-year holding period would also increase, in the event the investment has appreciated in value. Generally, the deferral and discount benefits on the original gain do not have a significant enough impact on IRR or ROIC to bridge the gap between two very different investment options. The 10-year step-up in basis benefit (elimination of gain on the OZ investment) has the potential to be the most advantageous but it is challenging to quantify and include in an IRR or ROIC calculation because it represents taxes saved on the sale of the OZ investment 10 or more years in the future. Therefore, many investors disregard this factor in their analysis, which can lead to misguided investment decisions. To achieve an “apples to apples” comparison between an OZ investment and a non-OZ investment, investors should consider after-tax cash proceeds on both the front-end and back-end of the analysis.  After-tax cash is an important and practical benchmark in the analysis because that is the amount an investor can actually use. We have developed an OZ benefits calculator to help you do just that. This tool will help you compare an OZ investment and a non-OZ investment by using the after-tax capital gain amount eligible for investing and calculating the rate of return needed on a non-OZ investment to yield the same after-tax cash proceeds as the OZ investment after 10-years. The calculator also enables you to customize current and future cap gain rates.
To make a truly informed investment decision on how to reinvest the proceeds from your capital gain event, investors must analyze all three benefits of an OZ investment and apply a uniform benchmark when comparing OZ and non-OZ investments.   
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. Baker Tilly Capital, LLC disclosure
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Opportunity zone investment benefits are an often misunderstood, but an important consideration when reinvesting proceeds from a capital gain event. Learn how to make an informed risk and return decision.   

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Calculating opportunity zone benefits to compare investment risk and return

Authored by Chase Murphy and John Melbourne Preparing for a capital raise and high-level process insights provides a high-level summary of the capital raise process and highlights key factors to consider when preparing for a capital raise. There comes a time in a business’s operating lifecycle where there may be a need to source outside capital. The timing of this need is very different for each underlying business and is typically influenced by key operational challenges that most early-stage businesses are forced to overcome at the onset of their venture (including product/technology development, inventory constraints, hiring of additional human capital, enhancing marketing/advertising, etc.). Unfortunately, there is no definitive reason to how or why these challenges occur and more often than not, the timing is often unpredictable. When early-stage businesses find themselves at this unique juncture, some elect to bootstrap their way through the adversity while others seek outside investment for cash and/or strategic purposes. Section 2 is designed to offer general insights into the capital raise process while also highlighting various things to consider when preparing to take on outside capital investments. Please note: there is no “one-size-fits-all” strategy for raising capital with each process being independently unique (typically differentiating from one another on a basis of operational maturity, human capital expertise, sector/vertical focus, technology and cash-flow generation, varying levels of investor interest) and no two outcomes are exactly the same. As a result, the following section is intended to offer high-level insights that are directional in nature and not definitive. Process and considerations when preparing to source capital              Prior to a company exploring its capital raise prospects, it is important to understand the structure of a typical process, key events that occur at each phase of the process and the level of detail/work involved. Figure 1 provides a hypothetical summary of what could be expected when venturing into a more traditional capital raise process and the underlying tasks that correspond with each stage.         
Process overview Setting the stage: Upon realizing the desire and/or need to raise outside capital is appropriate and will support the company’s current and future growth initiatives, it is imperative that the company’s objectives are clearly defined. Thoughtful preparation is critical at the onset of this phase as the details compiled will eventually evolve into the basis of your overall strategy and support your efforts throughout all subsequent stages of the capital raise process.  Key points to consider: The initial step after defining company objectives is to assess whether your business is investable and to measure the probability of executing a successful capital raise. Although there may be a perceived need for an investment, this belief does not necessarily mean the business is ready for an investment. Simply put, all businesses have different levels of potential and capital providers will have differing suggestions based on their assumptions. Operational growth and day-to-day focus cannot be ignored during this time, so one must be confident that allocating time to seeking outside investment is worth the effort and will not sacrifice the health of the business. Understanding available capital sources and underlying investor types is important. There are different types of investors at each stage of a company’s growth so knowing which ones to approach is essential. See Figure 2 below for a hypothetical summary of company growth and the typical timing of investor interest at each stage of development.
Once you understand where your company resides from an operational lifecycle perspective, you will have a better understanding of who the appropriate type of capital provider might be and can begin compiling a list of preferred investors. Some criteria that you’ll want to be sure to consider when building this list may include:
− Your investor will become your partner. Not only will you be exchanging equity ownership for cash, they’ll likely sit on your board, have voting rights and expect frequent financial, operational and performance-related updates. As a result, it is important that you seek out a partnership that will continue to be a fit throughout the short- and long-term period.
− There are numerous reasons why capital providers invest at different periods of a company’s operating lifecycle so it is important that you consider the following when assessing fit: 
   °  Industry/vertical focus
   °  Fund size and timing of investment – this will offer insight into potential investment size and anticipated investment horizon
   °  Prior investments history (i.e., type, size, time to exit, etc.)
   °  Value proposition each investor brings to the table (industry expertise, product/technology development, sales and marketing, strategic relationships, etc.). Preparing the materials: It is important to note that the later the capital raise (i.e., Seed and Series A – D), the more detailed your summary materials will need to be. Venture capital firms take more of an institutional approach to their diligence and expect entrepreneurs and business owners to present investment summaries in a more detailed format. This information is generally presented in what is called an Investment Opportunity Summary, which consists of 10-15 slides that cover key aspects of the business and industry. Each summary should be customized to the underlying business, but the following list captures common topics that are typically part of due diligence during preliminary assessments and will allow investors to gain a clear understanding of your business.  (Note: the following sample outline is more applicable to early/late-stage VC audiences):
Key things to consider: VC investors get inundated with thousands of investment summaries from entrepreneurs so the trick is to create a summary that is differentiated from the rest, concise and to the point (yet still detailed).  Short opportunity summary: there is no guarantee that an investor will review the entire opportunity summary, so this slide is intended to offer a quick summary of the business and capture the reader’s attention (i.e., your “elevator pitch”)  Market opportunity: this slide should include a top-down summary of the business’s total addressable market/market size (bigger is generally better). Current and future road map: this slide is essentially your company’s business plan and maps out short-to-medium term insights. It is critical that this slide mirrors your projections as it will essentially substantiate the equity ask and provide insights into how the investors’ capital will help you through each phase highlighted on this slide. Most investors will not only focus on the high-level initiatives outlined here, they will utilize this summary as an indirect assessment of an individual’s strategic vision and preliminary assessment of one’s ability to execute the underlying growth strategy. Team overview: the earlier the capital raise, the riskier the investment will be to a VC investor, so it is important to note that most will be paying particular attention to the individuals they are investing in. Financials and projections: as noted above, it is important that company projections are realistic and mirror the company’s current and future road map summary (the projections should also correspond with the “uses of funds” summarized on the final slide). Equity ask and uses of funds: having a clear equity ask will allow VCs to better understand perceived and/or real pre-money valuations. All investors will assess the opportunity differently, so not all will be in agreeance, but is important to their preliminary assessments. Be prepared to understand the implications of this equity ask (in terms of equity ownership dilution and how post-investment capital tables will be impacted). Tax planning considerations With the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), proactive tax planning and diligence continues to be a critical component for any transaction process. Careful consideration should be made regarding the tax impact raising capital may have on the business or the existing shareholder(s).  While the tax impact of an equity raise is dependent upon the individual facts and circumstances at play, there are some general topics to consider. You should consult a tax advisor when contemplating a transaction of this nature to review the relevant fact pattern.  Entity structuring: Partnerships, LLCs and S corporations 
− Pass-through businesses report items of income or loss to owners on an annual basis by issuing K-1s.
− Considered a single layer of tax, as company is generally not obligated to pay taxes. Partners and shareholders report and pay taxes on their share of income based on K-1s received.
− Raising capital in a pass-through context will cause an investor’s tax reporting to be intimately tied to the company’s return filing. The company will be required to provide each investor with a K-1 reporting their share of income or loss before the investor can file their return(s).
− S corporations are limited in the types of investors (natural persons and certain trusts), number of investors (fewer than 100) and single classification of stock. Consider any restructuring opportunities prior to raising outside capital to avoid defaulting on existing S elections.
− Consider administrative burden and any investor relation issues surrounding annual K-1 reporting. State-level K-1s may also be required for any companies with significant multistate operations.  Corporations
− Subject to double layer of tax. The corporation pays tax on annual taxable income of the business. Items of income or loss generally are not allocated to shareholders on an annual basis. Shareholders recognize income on any dividends received, creating the second layer of tax on distributable profits.
− Some administrative simplification with reduced shareholder tax reporting annually (no K-1s)
− No limitations on classes of stock or participation
− Most efficient structure if contemplating an eventual IPO
− Often preferred structure for any foreign or institutional investors  Common tax planning considerations: Sale or exchange of existing units versus issuing new units in a partnership – when a new party enters a partnership, careful consideration should be given to determine whether a sale or exchange has occurred with existing partners, or whether the entity issued additional units to the new member. If an existing partner receives a distribution of proceeds otherwise contributed by another partner, care should be given as to whether a taxable event has been created for the recipient via a sale or exchange of existing equity. A contribution of capital by newly admitted partner and receipt of additional units generally does not create a taxable event for existing shareholders, rather a dilution of previous ownership. Basis for investor dependent upon entity structure. Investment in C corporation gives shareholder basis in stock. Investment in partnerships can provide an investor an opportunity to “step-up” their basis in the partnership’s assets in certain circumstances, giving opportunity to recover investment through depreciation or amortization deductions against future income. Section 1202 qualified small business stock provides opportunity for the capital gains from select small business stock to be excluded from federal tax, assuming certain conditions are met. Primarily, stock must be issued by a domestic C corporation (certain industries excluded) with less than $50 million in assets and the stock must be held for five years. 
− Provides incentives for noncorporate taxpayer to invest in small businesses. Tax diligence – ensure timely and accurate reporting around all open tax periods. Lacking consistency around the compliance process can cause concern or loss of confidence with investors. Ensure all state and federal taxes are compliant prior to raising outside capital. Tax attribute limitations may exist in circumstances with a change in control of a C corporation. NOLs and other credits may be limited for future utilization.  If your business is structured as an S corporation, consider restructuring into a C corporation or a disregarded LLC to allow for non-natural persons (entities, VCs, PEs, etc.) to invest without consequence.  Short period returns may exist if any restructuring taking place. Conclusion Not all businesses are created equal and outside investments don’t always make sense for every company. Be sure to understand the implications of raising outside capital and only approach prospective partners that are a good fit now and into the future. Upfront preparation is key and will benefit your efforts throughout each phase of the capital raise process. Raising capital is not an easy task, timing is critical and the process tends to take longer than anticipated.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Preparing for a capital raise and high-level process insights provides a high-level summary of the capital raise process and highlights key factors to consider when preparing for a capital raise.

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Preparing your business for a capital raise, including tax considerations 

Authored by Eric Pochas When the Affordable Care Act (ACA) was enacted, it drew massive amounts of attention because everything about it was big. At roughly 2,300 pages of law on the day it passed, the ACA has given way to an additional 20,000 pages of regulation in the 10 years since. Also big is the ACA’s price tag. Subsidizing healthcare alone carries with it an annual cost of roughly $685 billion. Who will foot this bill? Here’s a hint: Think about the ABCs of Form 1095-C. ACA revenues tie back to multiple sources. One source is the employer shared responsibility provision, also known as the employer mandate to provide health insurance. The Congressional Budget Office projects that fees collected due to noncompliance with this mandate will exceed $200 billion by the second half of this decade. As previously outlined, the issuance and filing of Forms 1094-C and 1095-C are the mechanisms by which the Internal Revenue Service (IRS) holds applicable large employers (ALEs) accountable for compliance with the employer mandate. The IRS is making good on both its promise and responsibility to collect the fees that support the revenue needed to offset ACA costs. Would you like to see proof? Below is a list of proposed assessments issued by the IRS over the past 18 months to employers who asked Baker Tilly for advisement:
Those are big numbers! To understand why these proposed assessments are so big, it is worth revisiting when and how the IRS arrives at its propositions: When the IRS suspects an ALE did not offer coverage to full-time employees for the year, it multiplies $2,500 by the number of full-time employees (reported on Form 1094-C) minus 30. When the IRS suspects an ALE did not offer adequate coverage for the year to employees who ultimately received a premium assistance tax credit (a subsidy for purchasing individual coverage), it multiplies $3,750 by the number of full-time employees who received these subsidies. When the IRS suspects an employer is large enough to have to comply with the employer mandate, yet cannot find a Form 1094-C on file for that employer, it charges $520 per filed W-2. Relative fees also apply when forms filed by ALEs are not filed in accordance with annual IRS filing deadlines. Proposed assessments that go unpaid or unacted upon ultimately become real penalties which the IRS will impose interest and look to collect by way of its federal tax lien process. The hidden costs With the proposed penalties and fees for potential noncompliance with ACA coverage and reporting mandates come downstream cost considerations. Companies often must mobilize and dedicate resources with urgency to the cause of unwinding past actions and formally preparing to explain them. Third-party reviews may be in order to review corporate structure in consideration of controlled group rules. Legal counsel may need to be retained to interact with the IRS’ 4980H Response Unit and assist in constructing well-composed response arguments.  Goodbye “silver lining”  The good news in dealing with early-year penalty notices issued by the IRS had been their willingness to accept very general response arguments. For the 2015 and 2016 tax years, the IRS often accepted simply outlining basic actions taken – “we tried but it didn’t work.” With the impending release of 2017 notices last year, the IRS made clear its intent to intensify its scrutiny of response arguments.  We are seeing proof of this tolerance change. An employer who issued Forms 1095-C to employees argued that a proposed 2017 late filing penalty was unjustified because the late filing was beyond its control. The vendor hired to complete this second reporting deliverable could not due to technical issues. The employer attempted to secure its own access to the IRS’ Affordable Care Act Information Returns system so it could perform the transmittal on time. Ultimately, it took until November of that year to complete the filing. The IRS rejected the position that a vendor issue supported a reasonable cause argument. It stated the following:
The case is now at appeal.  Pulse check: 2019 ACA reporting  ALEs who manually file less than 250 Forms 1095-C must mail their 2019 form submissions to the IRS by the end of this month. Inevitably, we will find employers who will miscalculate the 2019 form total and, for various reasons, will surpass the 250-form threshold. These employers must scurry to find an outlet capable of recomposing their forms data and transmitting it before the March 31, 2019, deadline for electronic filers. Forms filed manually that exceed the 250-form threshold are subject to a penalty, one that we saw the IRS begin to impose for the 2017 tax year. As long as the ACA remains the “law of the land,” and as long as insurance premiums are being subsidized as a result of it, the IRS will play an active role in holding employers accountable for their shared responsibility. As demonstrated here, the penalties add up fast and stress organizations in often unanticipated and untimely ways.  True to form, the best defense here is a good offense. The practice of sound ACA compliance is thoughtful, purposeful, formal and strategic. As the ACA approaches its 10th year, it is a practice and responsibility that should be considered with permanence.
For more information on this topic, or to learn how Baker Tilly Vantagen specialists can help, contact our team. About the ACA in Action series and Baker Tilly Vantagen ACA in Action is a series of informative articles that provide practical perspectives on current matters of Affordable Care Act (ACA) compliance. Offering these perspectives are certified ACA specialists from Baker Tilly Vantagen who are well versed in how evolving ACA concepts are uniquely affecting everyday operations within impacted organizations. Baker Tilly Vantagen is the employee benefits administration and human resources consulting arm of Baker Tilly. We have been providing ACA compliance support since 2010 and preparing, issuing and transmitting Forms 1094/1095 on behalf of employers since 2015. Stay tuned for our last article in the ACA in Action series!
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Part three of our Affordable Care Act compliance series focuses on noncompliance penalties and how impactful they can be to organizations.

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ACA in Action: Part three: Pay to the order of … oh my!

The dangers of cyber threats are faster and more insidious than ever before. Where once the prevailing vision of cyber threat conjured up images of hundreds of hooded hackers working feverishly at laptops to access our personal data, now the hackers are machines that are much more effective and efficient than any bad actor. Read more on artificial intelligence replacing hacking manpower and five other cyber predictions for 2020 that will be sure to impact insureds and their insurers alike in Baker Tilly’s e-book 2020 Cyber Predictions.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

Baker Tilly's six cyber predictions that impact insureds and their insurers alike.

Calculating opportunity zone benefits to compare investment risk and return

Preparing your business for a capital raise, including tax considerations

ACA in Action: Part three: Pay to the order of … oh my!

2020 Cyber Predictions

Calculating opportunity zone benefits to compare investment risk and return

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