The new law allows for taxpayers to expense 100 percent of the purchase price of qualified property. Under the new law, qualified property is defined as any personal property with a recovery period of 20 years or less, with a few exceptions. The temporary 100 percent bonus depreciation can be applied to assets that have been placed in service after Sept. 27, 2017, and before Jan. 1, 2023. One significant change from prior bonus depreciation rules is the ability to utilize 100 percent bonus depreciation on the purchase of used trade or business assets. This is a favorable change from the previous provisions and greatly incentivizes capital purchases for the time period it is in effect. This broader definition of qualified property has had an impact on the buyer and seller in asset deals. The seller will potentially recognize increased depreciation recapture on the sale, while the buyer can more quickly recover a portion of its purchase price by allowing for an immediate tax deduction for amounts allocated to qualifying property.
While the change doesn’t appear to have directly driven additional M&A market activity, it has had an influence on the structure of transactions.
Along with the nontax benefits and flexibility that comes with acquiring assets, historically, buyers have preferred asset deals over stock deals for the ability to receive a step-up in tax basis of acquired assets. Now, with the ability to further accelerate certain depreciation deductions, asset deals are even more valuable to a buyer. Amounts allocated to the qualified property can now be immediately recovered through the 100 percent bonus depreciation. However, the benefits still need to be evaluated and compared to any additional incentives (i.e. gross-up payments) required by the seller in structured transactions, such as asset deals.
With the added incentive for buyers to structure transactions as asset deals, it is important for sellers to understand the tax implications of alternative tax structure to their after-tax proceeds. It is even more critical, when evaluating offers moving forward, to quantify any incremental costs early on in the process. With businesses taking advantage of the 100 percent bonus depreciation, sellers will have more depreciation recapture and taxable income that must be treated as ordinary income when tax returns are filed for that year. This also places a greater emphasis on the allocation of purchase price in assets transactions as amounts allocated to qualified property may provide the buyer with significant first-year tax benefits.
Asset intensive portfolio companies will see large benefits due to the large capital expenditures needed to operate the business.