How the Tax Cuts and Job Act Impacted Valuations

How has the Tax Cuts and Jobs Act (“TCJA”) affected business valuations? The impact of the TCJA is dependent upon the company being valued as well as the specific approach chosen for a valuation.  Listed below are a few key items that should be considered when using an Income Approach to valuation and when valuing the entity as a C corporation.

  • Change in After-Tax Earnings – Under the TCJA, the federal tax rate for a C corporation was permanently reduced from 35% to 21%. That should reduce taxes and increase after-tax cash flow, all else being equal, so if using historical earnings to value a company, make sure to account for this rate reduction. Also, update taxes to the new tax rate in any forecasts used in the discounted cash flow approach.
     
  • Discount Rate – The reduction to the tax rate will also affect the weighted average of cost of capital (“WACC”), wherein the cost of debt is reduced by the tax savings benefit of interest expense. Therefore, the lower tax rate will increase the discount rate due to less tax savings from interest expense. Also, be aware of the limitation on interest expense deductibility of 30% of adjusted taxable income, as defined by the TCJA.
     
  • Depreciation Expense – New allowances for depreciation need to be taken into account in any forecast of future income. In general, all qualified property purchased in 2018 through 2022 is 100% deductible in the year purchased. From 2023 to 2027, that percentage is reduced by 20% each year.  So if using the discounted cash flow method, sufficient years of cash flows to account for this tax savings will need to be included in the forecasts or the tax benefit of the depreciation will need to be accounted for separately and added to the valuation.

Remember, valuation is not an exact science and requires astute judgment in determining the correct approach and assumptions. If you need help in determining the value of your company, please contact Christy Samek at 412-697-5415.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2021 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
CARES Act, Tax BY Austin Nace
Disappointing News for Employers: Employee Retention Credit Ends Before Fourth Quarter of 2021
Welcome News for the Trucking Industry - Clarification of 100% Meals and Entertainment Deduction for Per Diems
Build Back Better Tax Legislation Update – International Tax Changes
Higher Estate Tax Exemption Amount for 2022
International Fraud Awareness Week 2021
Foul Ball - John Ruffo Attends a Baseball Game
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.

×