M&A Tax Talk Power shift, tax shift? - Deloitte
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M&A Tax Talk
Power shift, tax shift?
A change in presidential administrations often signals the possibility of changes in tax policy, and this is certainly true in the case of
the current transition. This article provides a high-level overview of President Biden’s proposed tax law changes to corporate and
individual taxes and the potential impact on M&A transactions if such changes are enacted.
Setting the stage policy documents to the public or deliver • Narrow majorities: House Democrats
More than two months after the nation a substantial, tax-focused economic control 222 seats in the 117th Congress,
went to the polls on Election Day, questions address. The proposals discussed herein compared with 211 for Republicans—a
around who will control the levers of power are gleaned largely from statements on significantly smaller majority than over
in the White House and on Capitol Hill are Biden’s campaign website, as well as from the past two years. Democratic victories
now finally settled. Joe Biden became the comments made during Democratic primary in the two Georgia Senate runoff races
nation’s 46th president at noon on debates, rallies, campaign speeches, on January 5 mean that Democrats
January 20 and will be working with a and briefings to reporters. Additionally, and the GOP hold 50 seats each in that
Democratic Congress. consideration will need to be given to the chamber. Democrats effectively control
potential impact on state tax legislation that the Senate since Vice President Harris,
A change in presidential administrations
may ensue following any federal tax in her role as president of the Senate,
often signals the possibility of changes in tax
policy changes. will cast the tiebreaking vote whenever
policy, and this is certainly true in the case
lawmakers are deadlocked. Democrats’
of the current transition. President Biden Second, it’s important to note that tax
slender majorities in both chambers will
campaigned on a platform of ensuring that law originates in Congress, not the White
leave leaders with little room for error as
businesses and wealthy individuals pay House, so any legislation that is enacted into
they navigate the sometimes conflicting
“their fair share” in taxes. To that end, he law inevitably will reflect the priorities of
priorities of lawmakers in the progressive
has proposed modifying or repealing key congressional leaders. Democrats hold the
and moderate wings of the party.
provisions of the 2017 tax code overhaul majority in the House in the 117th Congress,
known informally as the Tax Cuts and Jobs which officially convened on January 3, and Finally, the full impact of any tax law changes
Act (TCJA, P.L. 115-97). Among other things, have a narrow majority in the Senate after enacted in the early days of the Biden
he has called for increasing the top tax Sen. Kamala Harris became vice president administration will depend on whether
rates on corporations and upper-income on January 20. This potentially provides those provisions take effect prospectively
individuals (generally those with income an opportunity to enact some level of tax or are retroactive to January 1, 2021.
greater than $400,000) and for phasing increases in the coming two years. But the Retroactive enactment of tax law changes
out the deduction for certain passthrough shape, breadth, and timing of any legislative is uncommon and generally is viewed as
business income. If signed into law, these proposals that advance on Capitol Hill are unlikely. Nonetheless, the potential risk that
proposed changes may also affect M&A likely to be affected by: future tax changes might be retroactive
transactions and other deal activity. prior to the date of enactment is something
• Differing priorities: The Democratic that should be kept in mind.
This article provides a high-level overview
party has historically brought together
of Biden’s proposed tax law changes to Higher rates and other tax increases
politicians with widely disparate views
corporate and individual taxes and the Biden proposes to increase the corporate
on many issues, including tax policy, and
potential impact on M&A transactions if tax rate from 21 percent to 28 percent.
finding common ground could prove to
such changes are enacted. However, Further, he has called for a 15 percent
be challenging in 2021 and 2022. While
some significant caveats are worth minimum tax on book income for companies
Democratic taxwriters are united in their
keeping in mind. that report net income of more than $100
public criticism of the Republicans’ 2017
First, very little detail is currently available tax overhaul, they have not, for the most million for financial statement purposes but
on many of the proposals Biden has part, weighed in on many of the owe no US income tax.
put forward. Over the course of the specific proposals Biden laid out during
campaign, he did not release detailed tax his campaign.
1M&A Tax Talk |
Power shift, tax shift?
On the individual side of the tax code, after-tax cash proceeds of $72,000, resulting taxed at capital gains tax rates. If the gap
Biden proposes to increase the top rate in $7,000 of additional tax versus current between ordinary tax rates and capital
on ordinary income from 37 percent to its law; and the individual would recognize gains tax rates shrinks, tax sensitivities with
pre-TCJA level of 39.6 percent for those with after-tax cash proceeds of $60,400, respect to structuring earnouts between
taxable income greater than $400,000. resulting in $19,600 of additional tax versus buyers and sellers may become less
Long-term capital gains and certain current law. Similarly, if an investment important.
dividends would be taxed at ordinary rates fund treated as a partnership for federal
Alternatively, businesses may become
for individuals with income greater than $1 income tax purposes sells its interest in a
more concerned with tax structuring
million—an increase from the current top business today that was held for more than
alternatives. For example, a buyer typically
long-term capital gains and dividend tax rate three years, an individual investor (with
favors a structure that is treated as an asset
of 20 percent. Income from carried interests income of greater than $1 million) in a fund
acquisition or deemed asset acquisition
would also be taxed at ordinary rates. management partnership would generally
because it may deliver a step-up in tax basis.
(Under the TCJA, carried interests are taxed be taxed at the current capital gains rate of
If the rates increase, the tax basis step-up
at preferential long-term capital gains rates 20 percent versus 39.6 percent on his or her
will drive incremental value by providing
if held for more than three years.) In addition share of the “carried interest” income from
additional deductions that would offset
to raising the top individual rate, Biden the sale.
taxable income subject to higher tax rates.
proposes to tighten tax benefits currently
Additionally, if Biden’s 15 percent minimum
available to owners of large passthrough Importance of M&A future cash
tax on certain businesses becomes law,
entities, who are taxed as individuals, by tax analysis
a corporation with net operating losses
phasing out the deduction under section When planning for an M&A transaction,
(NOL) and paying no US income tax may not
199A for taxpayers with income of more buyers and sellers should consider
seem as attractive a target for acquisition.
than $400,000. evaluating these proposed changes and
Depending on how the 15 percent minimum
the potential impact they may have on
The current-law 37 percent top rate for tax is drafted, the new owner of the
transactions now. The potential increase in
individuals and the 20 percent deduction for corporation could be liable for taxes on the
tax rates and value of future tax attributes,
passthrough business income, both of which corporation’s financial income, even though
such as NOLs and tax basis step-up, should
were enacted in the TCJA, are currently the company may not have any taxable
all be considered when projecting future
scheduled to expire after 2025. income due to the NOLs.
cash tax flows, analyzing potential
M&A implications On the other hand, a business’s NOLs and outcomes, and considering appropriate
There has been some acceleration of other tax attributes may become more tax planning alternatives.
M&A deal activity in anticipation of these valuable as tax rates increase, because they
International tax proposals
proposed income tax rate increases. can be utilized to offset income that would
Biden’s proposed increase in the corporate
Business owners (corporations and otherwise be subject to the higher tax rates.
tax rate would also have an impact on global
individuals) that are contemplating such a
The analysis of different structuring intangible low-tax income (GILTI) and foreign
transaction may be motivated to close a
alternatives may also change. If long-term derived intangible income (FDII). Biden
transaction before the potential increase
capital gains are taxed at ordinary rates (for proposes to increase the tax rate on GILTI to
in tax rates. The following are simplified
certain individuals), sellers may not be as 21 percent from 10.5 percent and eliminate
examples to illustrate the impact of an
concerned with structuring transactions the exemption of a 10 percent return on the
increase in tax rates and do not contemplate
to achieve capital gains tax treatment. For average adjusted basis of foreign tangible
other taxes such as the net investment
example, if a buyer or seller is considering property from GILTI.
income tax or state-level taxes. If a
an earnout (i.e., generally a contractual
corporation sells today and recognizes gain Biden would encourage domestic
commitment to make a future contingent
of $100,000, the corporation will have after- manufacturing—and discourage offshoring
payment if post-closing conditions are met)
tax cash proceeds of $79,000 at current of US jobs and production activity—
in a proposed transaction, the earnout
rates. If an individual (with income of greater through a combination of tax penalties and
could be taxed at ordinary or capital gains
than $1 million) sells his or her business incentives. He has proposed an offshoring
tax rates. If the earnout is considered
today for capital gains treatment for tax penalty of 10 percent, on top of the 28
compensation (and, potentially, tax-
$100,000 of gain, he or she would recognize percent corporate tax rate, on the profits
deductible), generally the earnout payments
after-tax cash proceeds of $80,000 at of foreign production (of either goods or
will be taxed as ordinary income. If the
current rates. Absent other possible tax services) that are intended for sale in the
earnout is considered a deferred purchase
changes, if Biden’s plan to increase the United States. Further, he would eliminate
price (and, potentially, not tax-deductible),
corporate and individual income tax rates US deductions associated with moving these
generally the earnout payments will be
becomes law, the corporation would realize operations offshore. Additionally, Biden
2M&A Tax Talk |
Power shift, tax shift?
has proposed an advanceable “Made in Tax credits and initiatives Conclusion
America” credit of 10 percent that could be Biden proposes to expand the new Despite the present uncertainty over
applied to several categories of qualifying markets tax credit and work opportunity how much of President Biden’s tax policy
expenses, including those related to tax credit, create a new manufacturing agenda can advance through a closely
returning production to the United States, as communities’ credit, and retain and reform divided Congress and get enacted into law,
well as revitalizing existing closed or closing the Opportunity Zone program. significant tax law changes over the next
manufacturing facilities, incrementally few years remain a possibility. Biden’s tax
M&A implications
increasing wages paid to US manufacturing proposals may affect M&A activity and
These tax credits and initiatives may provide
workers, and retooling facilities to transactions, including the timing and
additional tax benefits to business owners
advance manufacturing competitiveness structure of transactions, as well as the
who grow their business and enter new
and employment. level of activity and value of transactions.
markets. Under the Opportunity Zone
When planning for an M&A transaction or
M&A implications program, corporations and individuals
integrating a recently closed acquisition,
With these proposed changes to may invest previously earned capital gains
it is important to start evaluating the tax
international tax, business owners may into certain communities and temporarily
proposals the Biden White House puts
continue to be motivated or incentivized to defer paying taxes on those capital gains.
forward, modeling potential outcomes, and
retain earnings and growth in the United Further, the taxpayer may also benefit from
considering the appropriate actions to take
States. When contemplating a strategic a basis step-up or permanent exclusion of
if and when these proposals go from high-
M&A transaction, US companies may capital gains, depending on how long the
level plans and talking points to fully
look to acquire domestic companies or investment is held for. As such, business
framed legislation with substance and
move a business’s operations back to the owners may be incentivized to expand
effective dates.
United States, though the complexity of and invest through the Opportunity Zone
international tax implications merit careful program if they are able to defer their capital
consideration as deals are considered gains, especially if those capital gains would
and structured. otherwise be taxed at ordinary tax rates (as
discussed above).
Want to learn more?
Reach out to our contacts below:
Jonathan Traub Lindsay Wietfeld Jess Williams Megan Sullivan
Washington National Tax Mergers & Acquisitions Mergers & Acquisitions Mergers & Acquisitions
Tax Principal Tax Partner Tax Senior Manager Tax Senior
Deloitte Tax LLP Deloitte Tax LLP Deloitte Tax LLP Deloitte Tax LLP
jtraub@deloitte.com lwietfeld@deloitte.com jrwilliams@deloitte.com megansullivan@deloitte.com
3M&A Tax Talk |
Power shift, tax shift?
Appendix: Summary of current and proposed tax law
Corporate and business tax proposals
Issue Current Proposed
Corporate tax rate 21% Increase to 28%
15% minimum tax on book income of companies reporting
US net income >$100 million but owe no US income tax
Foreign-source income Global intangible low-taxed Increase GILTI effective rate to 21%; potentially eliminate
of US multinationals income (GILTI) earned by US- exemption for 10% return on average adjusted basis of
based multinationals subject to a foreign tangible property; and calculate GILTI on a country-
50% deduction (effective rate of by-country basis
10.5%) through 2025 and a 37.5%
deduction (effective tax rate of
13.125%) thereafter
Exemption from GILTI applies for
a 10% return on average adjusted
basis of foreign tangible property
Offshoring and No direct incentives or Impose 10% “offshoring tax penalty” on profits of foreign
redomestication of disincentives production (including call centers and services) intended
US jobs for sale back into the United States; penalty would apply on
top of proposed 28% corporate tax rate for a combined tax
rate of 30.8% on any such profits
Deny deductions associated with
moving jobs and production offshore
and implement “strong anti-inversion regulations
and penalties”
Create advanceable “Made in America” credit of 10%
applicable to qualifying expenses such as those related
to returning production to the United States, revitalizing
existing closed or closing manufacturing facilities,
incrementally increasing wages paid to US manufacturing
workers, and retooling facilities to “advance manufacturing
competitiveness and employment”
Establish a “claw-back” provision requiring a company to
return public investments and tax benefits when they shed
United States jobs and send them overseas
Eliminate incentives for pharmaceutical and other
companies to move production overseas
Tax havens, base Base erosion and anti-abuse tax Reduce incentives for “tax havens, evasion,
erosion generally (BEAT) limits the ability of large and outsourcing”
multinationals to shift profits
from the United States by making
deductible payments to their
affiliates in low-tax countries
4M&A Tax Talk |
Power shift, tax shift?
Corporate and business tax proposals
Depreciation 100% immediate expensing for No specific proposal; may be affected by proposed
qualified property through 2022, minimum tax (see above)
then phased down each year
through 2026 to 20% (expires after
2026); special rules for longer-
production-period property and
certain aircraft
Community and workforce development incentives
Opportunity Zones (OZ) Allow tax-free capital gains for Reform OZ program by (1) requiring Treasury Department
investments held at least 10 years, review of OZ projects to ensure incentives are only
basis increase for investments held directed to projects providing “clear economic, social, and
at least five years, and temporary environmental benefits to a community,” (2) requiring
deferral of capital gains on existing recipients of OZ tax benefits to publicly disclose their
assets placed in OZ funds; final investments and the impact on local residents, and (3)
OZ designations were certified in providing incentives for Opportunity Funds to partner with
June 2018; election to invest capital nonprofit or community-oriented organizations and jointly
gains in an OZ expires Dec. 31, 2026 produce a community-benefit plan for each investment
New markets tax credit Available for up to 39% of a Expand and make permanent
project’s cost for investors in low-
income community businesses,
through 2020
Incentives for domestic No provision Establish a manufacturing communities tax credit for five
manufacturing years to incentivize qualified investment in communities
affected by mass job losses
Work opportunity tax Available to employers for hiring Expand WOTC target hiring groups to include
credit (WOTC) individuals from certain targeted military spouses
groups who have consistently faced
significant barriers to employment
(scheduled to expire after 2020)
5M&A Tax Talk |
Power shift, tax shift?
Individual income- and asset-based tax proposals
Issue Current Proposed
Ordinary income Top rate of 37% through 2025 Restore top rate to 39.6%
tax rates
Additional 0.9% Medicare income
tax applies to earned income
>$250,000 for joint filers and
$200,000 for single taxpayers
Capital gains, dividends 20% tax rate applies to long- Tax long-term capital gains and dividends at ordinary
term capital gains and qualified income rates for those with taxable income >$1 million
dividends
Additional 3.8% net investment
income tax applies to individuals
with income >$200,000 and joint
filers with income >$250,000
Exclusion from capital gains
tax for up to $250,000 single
filers/$500,000 joint filers on
qualifying home sales
Carried interests Treated as long-term capital gains if Tax at ordinary rates
held for more than three years
Passthrough income Generally taxed at owner’s Phase out section 199A deduction for filers with income
individual rate with a 20% >$400,000
deduction under section 199A
for domestic business profits;
deduction expires after Dec. 31,
2025
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