Top 10 observations on the Tax Cuts and Jobs Act (TCJA) from the perspective of business valuation professionals

BVR caught up with practitioners at the most recent AICPA Forensic & Valuation Services (FVS) Conference to collect some thought-provoking observations on how the Tax Cuts and Jobs Act (TCJA) is impacting valuations. Practitioners are still grappling with understanding the new law’s many provisions, so this list is certainly not exhaustive, and the thinking will continue to evolve.

  1. Known or knowable issue. In a litigation setting, there may be disputes over what was “known or knowable” if you have a valuation date between the dates President Trump was elected and when the new tax law was passed. Some practitioners will factor in a pre-enactment expectation into their valuations. What to do? Take a position and stick to it.

  2. Plans for increased cash flow. It is now necessary to have more consultative conversations with management over its plans in light of the new law changes that overall will increase a company’s cash flow. But not all of this extra cash will go to the bottom line. The company may increase wages, accelerate capital expenditures, invest in R&D, and the like. Are these plans reflected in the projections you get from management? Will the company change its capital structure? For fair value purposes, do these plans translate into what market participants might do? These are just some of the questions to think about.

  3. Cost of capital. There will be minor effects on the cost of equity and larger effects on the cost of debt due to interest expense limitations, so the impact to the weighted average cost of capital (WACC) will depend on the level of debt.

  4. Guideline transaction method. This method will be more difficult to apply because of the different tax regimes, but there is a model that converts older transactions and adjusts the multiples.

  5. The five-year DCF. Although the tax effects of certain provisions extend more than five years out, you can still do a standard five-year DCF and use separate analysis modules for the cash flow effects of those provisions, such as bonus depreciation or the interest expense limitation. You would add the main DCF to the separate DCF analyses to get the overall valuation.

  6. Reasonable compensation. The qualified business interest deduction (QBID) has changed the compensation game for pass-through entities, which may want to boost W-2 compensation to trigger the new 20% deduction.

  7. Alimony deduction. Valuation experts and attorneys feel that the IRS will follow a strict interpretation of the rule that eliminates the deduction for alimony payments that became effective Dec. 31, 2018. That is, a marital settlement agreement must be approved by the court or signed—not just agreed to—by the parties before that date for the alimony to be deductible.

  8. Divorce settlements. In addition to the alimony deduction, dependency exemptions and the deductibility for divorce-related professional fees have been eliminated. But practitioners should not assume that effective tax planning is no longer a critical element to marital settlements.

  9. Marginal vs. effective tax rates. Before the TCJA, most C corps were not paying the 35% effective tax rate—and post-TCJA they will not pay at the 21% effective rate.

  10. State income taxes. Not all states have adopted all of the TCJA provisions, so make sure you research what constitutes taxable income in the subject company’s state.

To read about additional observations from business valuation professionals, be sure to download the complete article from the February 2019 Business Valuation Update. In addition, recordings of all of the sessions from the conference are available on the AICPA website.