• Describe how goodwill is impacted by the TCJA
• Describe the difference in NOL limitations pre and post TCJA
• Define BEAT
• Describe how ASC 805 is impacted by the TCJA

Provisions

• Federal corporate income tax rate reduction from 35 percent to 21 percent
• Interest deductibility limitation
  • Limited to 30 percent of EBITDA (30 percent of EBIT in FY2023 and after)
  • Non-deductible interest may be carried forward over 5 years
• Expensing tangible properties
  • Full deduction application to new or used tangible assets
  • Phased out over 5 years starting 1/1/2023
  • Acquired tangible assets can be fully expensed in 2018
• NOL Limitations
  • NOLs occurred in FY2018 or before offset 100% of taxable income
  • NOLs occurred after FY2018 offset up to 80% of taxable income and can be carried forward indefinitely (no carry back allowed)
• Base erosion anti-avoidance tax (“BEAT”)
  • Compares actual federal tax with a 10% tax on EBT excluding intercompany payments (interests, management fees, etc.)
  • Greater of federal tax and BEAT is applied

Application

• Tax rate illustration
  • Common range was 35-40%
  • Now observing 21-27%
• Interest deduction
  • Show table to illustrate transition
  • Does it really matter?
    • High leverage companies are most at risk
    • Private equity
• Depreciation
  • Not applicable to land, but used equipment is fair game
  • Implied sale
    • 2018 expense existing tangible assets
      • Excludes real property
    • Bonus depreciation on capex
    • Table on fade out post-2023
  • Minority basis
    • Ensure your assumptions align to management’s intent
    • Bonus depreciation
• NOL limitation
  • Table of 100% offset in 2018 and 80% after
  • Impact is the reduce the value of NOL balance
• BEAT
  • Fairly rare application
  • Look for complex corporate structures

Impact on Goodwill

• Income approach
  • NOLs
    • Tax rate
    • Interest deduction
    • Amortization
    • Use limitation
  • Depreciation
    • Two forms of presentation
      • Addback Depreciation, Subtract Capex
      • No capex, no depreciation addback
    • How do you treat normalized capex/deprecation?
      • Most 5-year forecasts at this point end in 2022, last year of full bonus
      • Assume the delta is not significant
      • Forecast out capex and depreciation in totality (no cash flow impact shown in DCF)
      • Just capture delta between capex and depreciation beyond discrete period
  • Discount rate
    • Tax shield applied against cost of debt
    • Can we assume full use of tax shield?
    • Easiest to demonstrate how forecast interest compares to EBITDA/EBIT
    • If not, some net cash outflow may be reflected
• Market approach
  • The approach provides far fewer inputs to directly reflect the impact of tax reform
  • Market is assumed to reflect benefits of tax reform
    • When did this occur?  No right answer
    • How do you differentiate frothy market from increases due to tax law change?  You can’t.
  • Make sure if you use an EBIT multiple that you reflect GAAP D&A

Impact of ASC 805

• Similar impacts to IRR as we discussed in the Income Approach for ASC 350
• MPEEMs
  • Tax depreciation should be reflected in cash flows
  • Contributory charges
    • Need to reflect economic basis of fixed assets
    • Return of
      • Based on economic depreciation
    • Return on
      • Link through the economic depreciation for determining asset % of revenue
• Deferred taxes
  • While we don’t pretend we understood all necessary changes to DTAs before, tax reform hasn’t made it easier
  • Communicate to our clients that what we’re presenting may further shift due to DTA/DTL changes

International

• Non-U.S. owner of a U.S. company
• Look for BEAT