Re: New Tax Law - Witholding
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Can you explain how it will complicate backing arrangements?
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It will create major cash flow problems for backers, especially if they are doing it on a huge scale. Here's a chart I made for various ROIs which show the net cash flow for $200K of buy-ins. You'll eventually get the money back when you file your taxes, but it's a real hassle. Basically, you're going to have to have a 33 1/3% ROI to break even in terms of cash flow during the year:
Buy-Ins ROI Gross Net Withheld Net Cash Flow
200000 0.2 240000 40000 60000 -20000
200000 0.3 260000 60000 65000 -5000
200000 0.4 280000 80000 70000 10000
200000 0.5 300000 100000 75000 25000
200000 0.6 320000 120000 80000 40000
200000 0.7 340000 140000 85000 55000
200000 0.8 360000 160000 90000 70000
200000 0.9 380000 180000 95000 85000
200000 1.0 400000 200000 100000 100000
Sorry about the columns, they're straight when I type it in, 2P2's formatting is messing them up.
Given these issues, backers are probably going to be less willing to shell out the money since their return is being delayed, and/or will negotiate terms less favorable to the players. For example, a backer could make a player give the backer the amount of money withheld from the backer's share whenever the player cashes with an agreement to return the difference when the backer gets it back from the IRS. And makeup will have to be dealt with differently, since a player will not be able to get out of a hole, at least from a cash flow perspective, as easily now.
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