Margaret Amsden

Ensure your understanding of the new tax regulations to get the most return out of your investment!

Under the Tax Cuts and Jobs Act (TCJA), businesses have been impacted in multiple ways. In particular, businesses considering a transaction, such as a merger or acquisition, should be sure to discuss the following:

Depreciation
How can I take advantage of the increased depreciation limits?

Under the TCJA, depreciation limitations under Internal Revenue Code (IRC) Section 168(k) have been increased and expanded. The rules now allow 100% first-year bonus depreciation for qualifying assets placed in service between September 28, 2017, and December 31, 2022. This provision also applies to used property. There has also been an increase in the limits under IRC Section 179.

As a result of these changes, structuring taxable transactions as asset purchases rather than stock acquisitions may result in an immediate deduction of a portion of the purchase price in the year of acquisition. If the transaction is structured as an asset purchase, rather than a stock purchase, the purchase price allocated to personal property is eligible for the increased Section 179 expense deduction of $1 million, as well as the Section 168(k) bonus depreciation deduction of 100% of the cost.

Interest Expense Limitations
What is the true cost of borrowing based on the interest limitations?

The TCJA also imposes new limits on the amount of deductible interest expense to 30% of a business’ adjusted taxable income. To the extent that the interest expense is limited, it creates a carryover amount that does not expire, so it is timing difference versus a permanent difference. However, this factor is important to consider when determining acquisition costs and how leveraged the company will become as a result of the transaction. Owners may want to consider alternative capital resources other than debt to fund the transaction, or at a minimum confirm that the limitation in determining the true cost of borrowing is factored in.

The tax code does provide an exemption from the interest limitations for:

1. Businesses with average annual gross receipts of less than $25 million
2. Farming
3. Real estate businesses, assuming, in the case of real estate, the owner elects longer depreciation recovery periods

Pass Through Loss Limitation
The unfavorable treatment of pass through losses and net operating losses

Many business ventures generate tax losses in the first years of operation. Prior to the TCJA, these business losses were fully deductible on the individual’s tax return and, if they resulted in the owner having a Net Operating Loss (NOL), allowed the loss to be carried back. However, under the new regulations, owners cannot deduct excess business losses in the current year and NOLs are no longer allowed to be carried back.

An excess business loss is defined as the excess of aggregate business deductions for the tax year over the sum of aggregate business income and gains for the tax year plus $250,000 (single) or $500,000 (married joint-filer). Essentially, this means that if the sum of all of a taxpayer’s flow-through businesses generate a loss of more than $500,000 (married filing joint) the loss is limited at that amount. These losses are then able to be carried forward as a NOL.

The rules related to NOLs also have a new set of limitations:

1. NOLs are now limited to 80% of the taxpayers taxable income
2. Remaining amounts are available to carry forward indefinitely
3. Businesses can no longer carry back any net operating losses

The new guidelines are complex and contain many nuances. Fortunately, a solid understanding of these issues will allow you the opportunity to negotiate transactions to your benefit! For further information, contact Clayton & McKervey.