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What in business valuation does the Tax Cuts and Jobs Act impact? Everything—including fair value. Join Mark Edwards for a discussion on how NOL’s, goodwill and ASC 805 are all impacted by recent tax law changes. Understand the Base erosion anti-avoidance tax provisions and how expensing tangible property impacts your fair value assignments. Be confident in the changes you make for 2018 engagements with a thorough review of your income and market approaches.
Describe how goodwill is impacted by the TCJA
Describe the difference in NOL limitations pre and post TCJA
Describe how ASC 805 is impacted by the TCJA
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
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
Tax rate illustration
Common range was 35-40%
Now observing 21-27%
Show table to illustrate transition
Does it really matter?
High leverage companies are most at risk
Not applicable to land, but used equipment is fair game
2018 expense existing tangible assets
Excludes real property
Bonus depreciation on capex
Table on fade out post-2023
Ensure your assumptions align to management’s intent
Table of 100% offset in 2018 and 80% after
Impact is the reduce the value of NOL balance
Fairly rare application
Look for complex corporate structures
Impact on Goodwill
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
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
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
Tax depreciation should be reflected in cash flows
Need to reflect economic basis of fixed assets
Based on economic depreciation
Link through the economic depreciation for determining asset % of revenue
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
Non-U.S. owner of a U.S. company
Look for BEAT
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Prerequisites: Knowledge of Business Valuation Program Level: Advanced Preparation Required: None Delivery Method: Group Internet-Based Recommended CPE: 2 Credit Hours (Accounting Technical)
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