What Has Changed and How to Improve Deal Values in Domestic Corporate Transactions
By Michael Williams with BDO, a partner of the M&A Leadership Council
Dealmakers are living in a brave new world of tax rules now. Many describe the recent federal income tax legislation as historic—a once-in-a-generation event—but it would also be accurate to describe it as complex, with far-reaching strategic implications for organizations that transcend the tax function. M&A is no exception. Corporate purchasers and sellers in M&A deals may be positioned to take advantage of some of the recent tax changes to improve deal value, maximize income tax savings and minimize tax liabilities.
The changes are generally effective for tax years beginning after 2017. With tax reform of this magnitude, however, it is not possible to touch on all of them, so this article will focus on the five most significant changes influencing domestic M&A transactions involving corporations. It will not address the impact of changes on international income tax matters and cross-border M&A deals, or state and local tax implications.
Five key federal income tax changes affecting corporate M&A deals in the U.S.:
#1 - TAX RATE REDUCTIONS: Corporate tax rate reductions will impact transaction structures.
Key changes:
- The corporate income tax rate is permanently reduced from 35 percent to 21 percent.
- The highest individual income tax rate is reduced from 39.6 percent to 37 percent (but note that most individual provisions are set to expire in 2025).
- Owners of sole proprietorships and pass-through entities such as S corporations and partnerships who are allocated certain qualified income from their pass-through entities may obtain a deduction of up to 20 percent on this income, which effectively could reduce the highest income tax rate on this income to 29.6 percent (the deduction could land between zero and 20 percent depending on the circumstances).
- Individual tax rates on capital gains (20 percent), qualified dividend income (20 percent), and net investment income (3.8 percent) remain the same.
- The corporate alternative minimum tax is repealed, yet the ability to use minimum tax credit carry- forwards generated in 2017 and prior years has been preserved in a generous fashion. These carry- forwards may offset regular income tax liability for the years 2018 through 2020, and to the extent the credit carryforwards still exceed regular tax, 50 percent of the excess credit carryforwards are refundable for those years with the ability to obtain a 100 percent refund of whatever excess amount remains for 2021.
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