The Tax Cuts and Jobs Act (TCJA), passed in late 2017, changed many facets of tax planning, including mergers and acquisitions (M&A). TCJA created a variety of opportunities for mergers and acquisitions and any business considering a future M&A should be aware of the changes.
The biggest and best-known change in the corporate world are the reduction of the corporate tax rate to 21 percent and elimination of the corporate alternative minimum tax (AMT). When it comes to M&A, companies will find provisions that are even more relevant to their situation. For example, when it comes to bonus depreciation: the full cost of depreciable property is now immediately deductible. The qualified property can be used or second use property. However, bonus depreciation is subject to a phase-out after 2023. These provisions may generate immediate net operating losses (NOLs). NOLs are no longer fully deductible, although 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.
Another change includes business interest expense deductions are subject to new limitations. This might be a good time to evaluate alternative financing arrangements and looking 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 date rights to stock are vested, whichever is earlier.
As companies proceed, they would do well to keep an eye on which provisions are temporary and which are permanent.
The Big Picture
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 are considering a merger or acquisition, you also have to think about the type. A stock acquisition is 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 that the target’s assets carry over at their historic tax basis.
Another option is 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.
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.
Contact Christopher T. Coots, CPA for advice about your merger and acquisition.