Tax Policy Outlook – Impact on M&A September 2020
Confidential – For Discussion & General Information Purposes Only
Near-Term Corporate Support in CARES Act – Outlook For Extension is Unclear Massive government stimulus may amount to $10T of fiscal & monetary spending for a $20T economy Overview of Select Corporate-Focused Provisions Within the CARES Act
Total Cost Estimate: $1.7T1
Bonus Depreciation for QIP
Retroactively corrects technical error in TJCA to allow for immediate deduction for qualified improvement property
Estimated Cost: Part of $24B ‘Other Tax Provisions’
Employee Retention Tax Credit
Up to $5,000 tax credit for wages paid from 3/13/20 to 12/31/20, applied against social security taxes; potential expansion to make more companies eligible
Estimated Cost: $55B in 2020-21
Payroll Tax Deferral
Deferral of social security taxes arising from 3/27/20 to 12/31/20; half due in at end of ‘21 and ’22, respectively
Estimated Cost: $351B in 2020-21
NOL Carryback
Permits losses generated 2018-20 to be carried back up to five years for tax refund; extremely unpopular among democrats
Estimated Cost: $80B in 2020
Interest Expense Deduction
For 2019-20, interest expense deduction limit increases from 30% to 50% of 2019 or 2020 EBITDA
Estimated Cost: Part of $24B ‘Other Tax Provisions’
Federal Reserve 13(3) Programs
Backstop for Federal Reserve purchases of investment grade and fallen angel corporate bonds; CBO noted a high probability that programs will be profitable
Estimated Cost: Up to $454B
Source: Congressional Budget Office and the staff of the Joint Committee on Taxation (JCT) filed 4/27/2020, KPMG, Wells Fargo Securities, LLC 1. On a preliminary basis, CBO and JCT estimate that the CARES Act will increase federal deficits by about $1.7 trillion over the 2020-2030 period
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Biden Tax Proposals Released Before Primaries Provide High Level Outline of Increased Corporate Taxes In December 2019, Biden released a tax proposal perhaps better characterized as a set of aspirations rather than a detailed plan Overview of Select Proposals Within Biden Tax Plan
Total Revenue Est.: $3.7T1
Corporate Income Tax
Higher corporate tax rates at 28% may be challenging to pass if the economic backdrop is depressed
Estimated Cost: $1,300B
Payroll Tax
Modifies the current cap on Social Security taxes, effectively increasing personnel costs ~4.9% for every dollar the cap is raised
Estimated Cost: $808B
Capital Gains Tax
Proposal would tax capital gains as ordinary income for individuals with incomes above $1 million
Estimated Cost: $503B
Global Minimum Tax
May reduce the deduction for how much CFC income is taxable in the U.S., effectively doubling the minimum tax, while switching from aggregate CFC income to country-by-country analysis
Estimated Cost: $309B
Alternative Minimum Tax
Initially proposed at 15% (rather than the previous 20%); AMT is generally despised among tax practitioners as it requires duplicative calculations
Estimated Cost: $166B
Passage of Biden’s tax proposals would likely require Democratic control of the White House and Congress – recent polling data indicates this outcome may be increasingly likely Source: Tax Policy Center Urban Institute & Brookings Institution, “An Analysis of Former Vice President Biden’s Tax Proposals,” March 5, 2020, including proposals as of February 23, 2020 1. Estimated cost details over a 10-year period based on conventional method are adapted from “Details and Analysis of Former Vice President Biden’s Tax Proposals,” April 29, 2020
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Illustrative Implications of Higher Capital Gains Tax Rates Owners may Drive Business Success but Generate Less Sale Now
($ in Millions)
Sale in 5 Years
Commentary
EBITDA Exit Multiple Proceeds from Sale
$100 12.0x $1,200
$161 12.0x $1,933
Annual EBITDA growth of 10%
Capital Gains Tax Rate Taxes Paid Net Proceeds
23.8% 286 $914
39.6% 765 $1,167
Capital Gains Rate = Personal Income Rate
$914
$725
10% discount rate for time value of money
Present Value
($190)
Value Gain / (Loss) of Holding
Difference of future sale and sale now
(21%)
% upside / (downside)
% Upside / (Downside) Sensitivity of Holding Tax Rates 25.0%
30.0%
35.0%
40.0%
5.0%
(17%)
(22%)
(27%)
(32%)
(38%)
10.0%
+5%
(2%)
(8%)
(15%)
(21%)
15.0%
+31%
+23%
+15%
+7%
(2%)
20.0%
+62%
+52%
+42%
+32%
+22%
Discount Rate
Annual EBITDA Growth
20.0%
Tax Rates 20.0%
25.0%
30.0%
35.0%
40.0%
6.0%
+26%
+18%
+11%
+3%
(5%)
8.0%
+15%
+8%
+1%
(7%)
(14%)
10.0%
+5%
(2%)
(8%)
(15%)
(21%)
12.0%
(4%)
(10%)
(16%)
(22%)
(28%)
Given likelihood of tax increases many businesses are actively exploring ways to return capital to shareholders in 2020 (and 2021 assuming tax changes are not retroactive) Source: Wells Fargo Securities, LLC
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Potential Ways to Get Ahead of the Tax Man
While timelines are tight for a 2020 execution, we are working with various family and managementowned businesses as they explore ways to return capital to shareholders before the end of the year
Change of control sale transaction, either LBO with meaningful shareholder rollover or complete sale to a strategic
Accessing the capital markets, e.g., term loan B or HY issuance, to fund a dividend
Structured minority equity/mezzanine debt raise to fund a dividend
Op co/Prop Co structure that includes 3rd party investment in Prop Co and significant distribution to shareholders
Source: Wells Fargo Securities, LLC
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