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Private Equity Perspective: Taxing Times

Middle-market companies will lose more than $1 trillion — that's trillion with a "t" — in equity value if the Corporate Interest Tax deduction is eliminated, according to a new study released at the Association for Corporate Growth's 2016 InterGrowth Conference in New Orleans. Dealmakers are following policy issues more closely in this presidential election year.

ACG, which boasts 14,500 members and advocates for middle-market company growth, collaborated with RGL Forensics of Dallas on the study, which quantified the cost of cutting the CIT deduction based on likely changes that would follow in the cost of capital and future growth rates.

Cutting the CIT deduction without offsetting benefits would lead to a 6.3 percent drop in equity value for U.S. middle-market enterprises—those with between $10 million and $1 billion in annual revenue. That equates to more than $1 trillion. With a 0.5 percent decrease in growth, equity value would decline by 15.3 percent, or about $2.5 trillion.

"Eliminating the corporate interest tax deduction would create significant risks for middle market companies, which is a vital segment in the U.S. economy," says Matthew Morris, RGL Forensics partner and the study's presenter at the ACG conference. "While it is unlikely we can fully predict all of the ways that eliminating the CIT deduction would affect companies, its central role in valuations and capital spending decisions warranted the analysis."

"These findings will educate policymakers about the impact of eliminating the deductibility of interest on the businesses that provide 48 million middle market jobs," says Gary LaBranche, president and CEO for ACG.

The study points out that corporate valuations are dependent on their cost of capital and long-term growth rates, and that the CIT deduction affects income, the cost of capital and growth in the value equation.

The study also shows that the impacts of the CIT deduction are most notable for consumer discretionary, energy, healthcare materials and telecommunication services companies, and it has less of an effect on consumer staples, industrials and information technology companies.

The CIT is one of several federal tax and regulatory issues on ACG's radar that could have significant effects on the middle-market.

As appeared in Mergers & Acquisitions, July 2016.

*Effective December 2018, RGL Forensics joined Baker Tilly US, LLP. This article was published while we were RGL Forensics. The author(s) or team member(s) quoted from RGL are now employees of Baker Tilly.

Matthew R. Morris
Managing Partner

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