It is that time of year, tax season is upon us and certainly on our minds. So how will the new 2017 Tax Reform Act affect M and A transactions?
I realize that taxes are not a subject that stimulates most people, but I’m certainly excited about what these changes mean for mergers and acquisitions. As you might guess, the most important change was the permanent reduction of the corporate tax rate from a graduated top rate of 35% to a flat, fixed rate of 21%. Additionally, the Alternative Minimum Tax was repealed.
These changes let companies control more of their earnings allowing them to potentially provide higher dividends to their shareholders, reinvest in capital assets and, of course, have available more money to purchase other companies.
Another important feature of the 27 Tax Reform Act is in many instances it diminishes the impact of double taxation on earnings and gains to shareholders. The act also extends the bonus depreciation rule to allow tax payers to deduct as much as 100% of the cost of most tangible assets such as machinery and equipment. This would allow the company to purchase new or used assets and fast track the write off. This does not apply to real estate and a couple of other asset categories.
For purchasers of companies, this means increased accelerated deductions. For sellers, exposure to increased depreciation recapture. The thought process is this type of deduction should cause an increase of asset transactions versus stock transaction for the buying market.
Finally, the repatriation of moneys bringing off shore funds back into the system is adding to a glut of capital available to invest in companies.
These changes to the tax code should allow companies to have available more funds to invest in acquisitions causing valuations to remain high and activity to remain constant for the year. But just like the recent sell off of the stock market, a potential spoiler is looming for the future.
Interest rates have started to go up. As capital becomes more expensive, valuations tend to go down. I’m not suggesting we are at the peak of the market, I don’t have a working crystal ball that tells me the future. I am suggesting positive trends don’t last forever.
In closing, the current 2017 Tax Reform Act should have a positive impact on the business community allowing companies to retain more of their earnings, providing more discretionary dollars for purchasing companies. This should continue to fuel M and A activity.
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In addition to hosting "Texas Business Radio," Matt is an investment banker and serial entrepreneur from Montgomery, Texas. He is the owner of RREA Media and Register Real Estate Advisors and a Managing Director and Principal at Corporate Finance Associates. He has a BS from the United States Military Academy at West Point and an MBA from Rice University in Houston. You can read more about Matt HERE.