• Business_transactions
  • Thu, Mar 15, 2018
  • How the Tax Reform is Impacting Private Equity and M&A Transactions

    At the end of 2017, President Trump signed a bill into law that would initiate the most significant change to United States tax policy that our country has seen since 1986. This tax reform legislation has significant implications for both individuals and corporations. We believe it is important for everyone to have a basic understanding of how things have changed.

    Private equity and M&A transactions will be impacted by this tax reform act. Following are a few key points from the new legislation that business owners and companies should be aware of.

    1. Corporate Tax Has Been Reduced to 21%

    Prior to this new legislation, the corporate tax rate was at 35%. This change could see several effects when it comes to private equity and M&A transactions. First, a decreased tax rate could enable some companies to have more capital available to improve their operations or expand their business. Second, it could also lessen some of the extra expenses that corporations incur from deduction limitations on interest rates. Additionally, this corporate tax cut can raise the stakes on transactions, making the competition more intense.

    1. Deduction for Qualified Business Income from Pass-Throughs Set at 20%

    This aspect of the tax reform legislation allows those filing for a pass-through to benefit from a 20% deduction. The overall industry view of this change is positive because it allows eligible partners to lower their amount of income that must be taxed at ordinary rates. This qualified business income should come from a partnership, sole proprietorship, or S-Corporation.

    1. Look-Through Rule Will Be Applied to Gains on Sales of Partnership Interest

    According to this detail of the tax reform, any gain from selling a stake of a partnership that is associated with a United States trade or business will be treated as taxable income, even if the individual is not an American citizen. It would be necessary for the transferee of any partnership to withhold 10% of the amount gained. This regulation could have negative implications on how United States businesses and individuals are able to develop foreign partnerships, since every gain associated with any transfer would be subject to withholding.

    If you are planning on buying or selling a business in the near future, and want to know more details on how these recent changes would impact your transaction, please reach out to one of our experienced M&A advisors.