Valtrend - Butler Business Valuation

Tax Reform and its Impact on Valuations: It’s Complicated

There are many good points in the recent tax reform which point to a positive impact from the recent tax reform (and as “confirmed” by the recent stock market performance):

  1. A reduction from a 35% tax rate to only a 21% tax rate.  Publicly-traded stocks, however, for the most part already had an effective tax rate lower than 35% with all of the ways to avoid taxes.  Thus, the impact may be a bit muted.
  2. Starting in 2018, US companies will only have to pay foreign taxes on foreign income and, therefore, be able to bring it back to the US at any time.  For companies with large foreign cash reserves, this is a big deal.
  3. Immediate “depreciation” or expense of expenditures on tangible assets, which also acts to lower effective tax.However, the income tax deductibility of interest payments will be limited to the first 30% of adjusted taxable income..  Thus for certain companies, their cost of debt and resultant cost of capital, all else being equal, will be greater.  So, certain companies will be better able to take advantage of these reforms than others…

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