The TCJA, which was passed late in 2017, runs some 70,000 words, and experts continue to pore over its provisions. Of particular interest to businesses are the provisions that affect the wide world of M&A. Any business that thinks an M&A may be in its future should know what’s changed thanks to the TCJA.
Among the biggest — and best-known — changes in the corporate world are the reduction of the corporate tax rate to 21 percent and the elimination of the corporate AMT. But when it comes to M&A, companies will find provisions that are even more relevant to their situation.
For example, see what’s new with bonus depreciation: The full cost of depreciable property is now immediately deductible. The qualified property can be “used” or “second use” property. (Absent other action, however, bonus depreciation is subject to a phase-out after 2023.) These provisions may generate immediate net operating losses. NOLs are no longer fully deductible, however; they are now capped at 80 percent of taxable income. Unused NOLs may be carried forward indefinitely, but they can no longer be carried back to earlier years.
There’s more: Business interest expense deductions are also subject to new limitations. This might be a good time to look into alternative financing arrangements and to take a fresh look at the leveraged buyout situation. Investment interest expense is not subject to this limitation. Those working in privately held companies should note that they can now defer income from stock or exercise of stock options for up to five years from the date of the transfer or the date rights to stock are vested, whichever is earlier.
As companies proceed, however, they would do well to keep an eye on which provisions are temporary and which are permanent — or as permanent as anything is in Washington!
Looking at the Big Picture
Of course, some things haven’t changed. There are a lot of moving parts in an M&A, regardless of the tax situation.
Consider the economic situation: Is there a lot of cash on the table available for M&A activity in your industry? What is the interest rate situation? What are the current valuation multiples?
If you’re thinking of a merger or acquisition, you also have to think about what kind it is. A “stock” acquisition is just that — an ownership interest in a C or S corporation. The acquiring entity receives a tax basis in the stock acquired equal to the consideration paid. Keep in mind, though, that the target’s assets carry over at their historic tax basis.
Or you can do an “asset” acquisition, which is the purchase of the assets of a business instead of the stock. The purchase of assets typically results in a step-up in the asset basis; the acquiring entity receives basis equal to the consideration paid and liabilities assumed.
No matter how you do it, be sure to work with a firm that is well-versed in the current laws, as there are a lot of subtleties and the situation can change quickly.