On December 22, 2017 President Trump signed the Tax Cuts and Jobs Act (the “Act”) which will have a far reaching impact on private equity funds, their investors and portfolio companies. The following is a summary of key provisions of the Act that will affect private equity sponsors beginning in 2018. The list is a high-level review of certain provisions and there are a number of definitions and qualifications to consider. Please contact us to discuss any of these.
Key Provisions for the Private Equity Industry
|Provision||Summary of Changes||Result|
|Corporate Tax Cut||Corporate tax is reduced from a graduated scale with a maximum rate of 35% to a flat 21%||Positive/Neutral|
|Flow Through Entity Tax Cut||Companies with “Qualified Business Income” will receive a 20% deduction, effectively reducing ordinary income tax rate from 39.6% to 29.6% *
* Assumes full 20% deduction mechanics apply
|Carried Interest Holding Period||Holding period for long-term capital gain treatment increased from one year to three years||Negative/Neutral|
|Interest Expense Deduction Limitation||For businesses with > $25 million in gross receipts, limits the tax deduction for interest to interest income plus 30% of a calculated amount resembling EBITDA *
For businesses with < $25 million in gross receipts, no limitation
There is no “grandfather” rule for existing debt
* Disallowed interest is carried forward indefinitely.
|Corporate Alternative Minimum Tax (AMT)||Repeals all provisions of the AMT system
Any unused AMT credit carryforwards can be claimed in 2018 and beyond
|Net Operating Loss (NOL) Utilization||Limits the deduction for net operating losses (NOL) generated in 2018 and beyond to 80% of taxable income
Usage of NOL’s generated prior to 2018 will be unlimited
The Act also eliminated the carryback of any NOL
|Immediate Expensing of Certain Capital Expenditures||Extends the bonus depreciation rules to allow taxpayers to deduct 100% of the cost of most new and used tangible property (other than buildings and some building improvements) and most computer software in the year placed in service
Beginning in 2023, the 100% deduction will be reduced to 50% and further reduced in subsequent years
|Partnership Technical Termination Rule||Repeals the technical termination provisions in connection with a sale or exchange of 50% or more of the total interests in partnership||Positive|
The above summarizes some of the provisions of the Act that impact private equity sponsors and their portfolio companies. It should be noted that there are many other provisions in the Act, specifically related to international taxation, which may further impact private equity sponsors and their portfolio companies. Further, Treasury Regulations are expected to be issued in the future, which may change the way some of these provisions operate. Like it or not, tax reform is here to stay.
Tad N. Render, CPA leads the M&A practice at Miller, Cooper & Co., Ltd., a Chicago-based accounting and consulting firm.