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New Tax Act

The New Tax Act will definitely impact the use of valuation services. We strongly suggest each person and company coordinate with their tax advisors, since the law is subject to varying interpretations and rather complex planning alternatives.

As an overview, our services will be required for the following:

  1. Conversions of corporate forms from C to S and S to C. The new corporate rates favor C corps (reduced from 35 to 21%); at the same time, pass-through entities (S corps and LLCs) may benefit from an extra 20% deduction from net taxable income before the calculation of the tax at the individual level. And, the top individual rate has been reduced from 39.6 to 37%. A C corp is also subject to a reduced tax deduction from dividends received from subsidiary corporations. Finally, C corp distributions in excess of E&P reduce the shareholders basis in the stock. In the event of a C to S conversion, the built-in gain (BIG), possibly subject to future taxation, must be calculated. A business valuation of the company at time of conversion is the best way to support the BIG amount.
  2. Carried interests (also known as earned but unpaid promote fees) for general partners in partnerships must be calculated via a valuation of the entity. Also, to receive long term capital gains treatment, the interest must be held for three years (versus one year previously).
  3. We expect many more acquisitions will be completed as asset purchases. The new Act increases the bonus depreciation to 100% for personal property acquired (new or used) after September 27, 2017. In addition, IRC Section 179 allows for expensing qualifying property up to $1 million.
  4. The same bonus depreciation and expensing provisions stated above expand the already positive benefits of our cost segregation services. Significant tax savings arise from assigning acquired (or portions of new construction) depreciable improvements to tax lives of 5, 7, and 15 years, versus the building tax life of 39 years (apartments are 27.5 years). The present value of these early years' tax savings should outweigh the future recapture at ordinary income rates.
  5. New rules for Section 1031 property exchanges apply only to real property. Personal property cannot be part of these tax-free transfers. The cost segregation of these properties clearly identifies personal property that is not part of the exchange. However, the acquired personal property is subject to the aforementioned bonus depreciation and expensing provisions, in addition to the shorter tax depreciation lives. To isolate the maximum personal property, it must be supported by an engineering analysis that is a cost segregation.
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