Merger and acquisition activity in the first half of 2018 in the United States was the highest it has ever been according to data from Thomson Reuters as reported by Axios in this article. Although there are a number of factors that contributed to this M&A boom, the impact of the TCJA has provided an acquisition-friendly tax landscape for businesses to operate. On top of the highly publicized drop in the corporate tax rate to 21%, subtle changes to the bonus depreciation rules could be an even bigger driver of merger and acquisition activity.
The TCJA expanded bonus depreciation to allow for immediate expensing of 100% of the cost of fixed assets with a useful life of 20 years or less. This full expensing provision has received a fair amount of attention since the Act was passed this past December. Under the bonus depreciation rules prior to the TCJA, only new assets were qualified for bonus depreciation treatment. Under the TCJA, as long as the assets are new to the taxpayer, they are eligible for bonus depreciation and can be immediately expensed.
The ability to write off an asset acquisition in the year of purchase can provide a significant bump in depreciation expense that may be an enticing piece of the puzzle in determining the potential benefit of an acquisition. The example below illustrates how the tax benefit could work for an acquirer.
XYZ Corp is a large gas station owner/operator. In 2018, XYZ acquires 123, LLC in an asset acquisition. The $1 million purchase price is allocated as follows:
|Equipment & Furniture||$200,000|
In the case of gas stations, the building asset has a 15-year useful life. As such, each asset that was acquired in this purchase has a useful life of 20 years or less and even though the assets were used by 123,LLC, they are still eligible for 100% bonus depreciation in the year of acquisition by XYZ Corp. XYZ Corp. will enjoy a $1 million deduction resulting from this asset acquisition in 2018, resulting in potential tax savings of $210,000 based on the new 21% corporate rate.
Companies outside of the gas station owners will also enjoy the benefits of full expensing on short-lived property. Manufacturers will be able to immediately expense machinery and equipment purchased in an acquisition. Commercial real estate owners will be able to expense all furniture, equipment, and land improvements acquired, even though the building, as 39-year property, will not be eligible for 100% bonus depreciation. The addition of used property to the list of bonus-eligible assets may prove to be beneficial for businesses across a wide range of industries.
The tax ramifications of any M&A activity must be considered in the context of the business purposes and potential opportunities and risks. Although the new bonus depreciation rules allow for an improvement in the tax circumstances surrounding asset acquisitions, careful consideration should be taken, as the tax consequences are only one piece of the puzzle.