Spring 2018 issue of Horizons

The gain exclusion is limited to the greater of $10 million or 10 times the owner’s basis in the stock. To be qualified business stock, the portfolio company’s total assets cannot exceed $50 million immediately before or after the acquisition. Interest Deduction The old tax law generally imposed no limit on the amount of deductible interest. In what can be described as a seismic shift in the new tax law, starting in 2018, a company can now only deduct net interest expense equal to 30% of its tax based EBITDA, or taxable income adjusted for interest, taxes, depreciation and amortization. The new interest deduction limitation applies to all taxpayers, on all related or unrelated transactions, domestic or foreign debt and existing, as well as, newly incurred debt. Starting in 2022, this limitation on deductibility tightens further to 30% of tax EBIT, or taxable income adjusted for interest and taxes only. Businesses with average annual gross receipts under $25 million are exempt from the limitation. Any disallowed business interest expense is carried forward. The disallowed interest is not considered a net operating loss limited by those rules under section 172. A disallowed interest deduction can be carried forward indefinitely and 100% of the carryforward is available in any tax year. The carryforward, however, is subject to the rules of section 382, like net operating loss or credit carryforwards, which limit a

corporation’s ability to deduct such losses or claim tax credits following an ownership change. The change in interest deductibility is likely to increase the cost of capital and may cause an increased use of preferred equity structures over traditional subordinated debt. Immediate Expensing of Business Assets and Net Operating Losses Bonus depreciation expensing has been in the Internal Revenue Code for years. Prior to 2018, the bonus depreciation percentages varied from 50% to 100% for newly (sometimes called original use) acquired tangible personal property with no limitations on the amount that could be expensed. For property placed in service after September 27, 2017, taxpayers are now allowed full expensing (100% bonus depreciation) of their acquisition costs for new and used property. After the effective date, private equity firms doing straight asset acquisitions or deemed asset acquisition under sections 336(e) and 338(h)(10), can expense 100% of the consideration allocated to qualified tangible depreciable property. The 100% expensing is reduced 20% per year for property placed in service after December 31, 2022. As attractive as this expensing rule sounds, some discretion is advised. Net operating losses occurring after 2017 cannot be carried back and may be carried forward indefinitely, but cannot offset more than 80% of taxable income in the carryforward years.

New Tax Law Won’t be a Deal Killer for Private Equity

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