Tax code changes enacted through the Tax Cuts and Jobs Act (TCJA) earlier this year are having an impact on many aspects of M&A transactions.
The TCJA has altered the entity choice for a variety of reasons, from the reduced corporate tax rate (35 to 21 percent) to a widening of tax brackets for individuals. You’ll want to revisit the entity choice for existing structures and future transactions by employing a more holistic view to analyze both tax burdens and legal and practical considerations.
These changes have altered the positions of buyers and sellers by potentially adjusting the model of a transaction. For example, the reduction in effective tax rates on business income may result in lower demands for a tax gross-up payment or reduce the cash value of tax attributes. New limitations on business interest expense deductions may impact the cost of debt-financed acquisitions as well.
Furthermore, a buyer’s approach to conducting tax due diligence on target companies may be altered based on several considerations such as net operating losses being subject to new limitations and enhanced depreciation bonuses.
As you consider M&A transactions, make sure you have the most current information on TCJA handy. Read more about its implications here.