Subject to certain limitations, investors can choose between providing debt and equity funding to a start-up company. In cases in which the venture turns out to be unsuccessful, debt financing can provide significant tax advantages to the investor in the form of ordinary bad debt deductions. The recent US Tax Court case of Rutter v. Commissioner demonstrates the importance of proper tax planning in order to sustain the characterization of an advance to a biotech start-up as indebtedness for federal income tax purposes. Mark Leeds of the New York office of Mayer Brown analyzes this new case and provides insights on tax planning for investing in start-ups in the attached Mayer Brown Legal Update.
This Legal Update was republished in the February 2018 edition of Intellectual Property & Technology Law Journal.