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The Impact of the 2017 Tax Cuts and Jobs Act on Business Valuation

Marissa Pepe Turrell & Mark Harrison

The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017. The first major tax overhaul since 1986, the TCJA made significant changes to the taxation of individuals, C corporations, and pass-through entities. These tax changes impact the valuation of businesses in various ways, depending on the structure of the business.

The following chart summarizes some of the major tax changes for businesses.

Major tax changes for businesses

Major tax changes for businesses

Many of these changes, particularly the corporate rate decline, are expected to offer tax savings to corporations. The savings may not be as large as the decrease in rate implies—the prior maximum rate of 35 percent is cut to a flat 21 percent—as most companies have historically paid an average effective federal corporate tax rate that is closer to 22 percent. For pass-through entities (LLCs, partnerships, and S corporations), any reduction in tax rate is more complicated, as discussed later.

How do these tax changes impact the value of businesses? Although the TCJA was passed more than a year ago, the consequences are still hard to pin down. The reasons for the continued uncertainty are numerous.

First, the TCJA’s impact on a business’s taxes can be unclear, even to a business’s owners. Some of the tax law changes are complicated, particularly for pass-through entities. Not all businesses will see tax savings.

Additionally, the public and private markets’ interpretation of the tax cuts on company values has been challenging to quantify. Private markets are often difficult to track, data can be hard to obtain, and there can be a significant time lag in getting quality information. However, the impact of the TCJA on publicly traded stocks has also been hard to isolate. Consider that tax cuts for businesses were considered probable as soon as President Trump was elected to office. It took more than a year for the TCJA to become law, and the market therefore had plenty of time to consider the value of the potential tax cuts. Along the way, many other factors caused public company values to vary. By way of example, the S&P 500 increased 25 percent from November 9, 2016, (i.e., the 2016 national election) to January 2, 2018. Within this same period, there was a 10-percent increase from August 30, 2017, (after a major tax reform speech by the President) to January 2, 2018, but only a four-percent increase from November 9, 2017, (which was when the Senate and House agreed to a 20-percent corporate tax rate) to January 2, 2018.

Finally, business owners’ decisions about what to do with any tax savings will impact value. Keeping the savings in the form of distributions, leaving the cash in the business, investing in business growth, paying employees more to keep up with competition, and buying back company stock each will have differing consequences on the value of the business.

The tax law is designed to stimulate economic growth in part by encouraging companies to invest in more fixed assets on the assumption that, if businesses do that, they may increase value. For example, a manufacturer could take advantage of the temporary ability to depreciate 100-percent of fixed asset purchases by buying new, more efficient machinery. The company would then grow its plant capacity, manufacturing more products, boosting the company’s cash flow, and raising the company’s value.

Alternately, companies could use the tax savings to increase wages or offer bonuses to employees. Companies may need to do this to track with competitors doing the same. However, raising wages in and of itself does not increase capacity, and no additional cash flow is created. This scenario does not result in an increase in value.

Many companies are using the extra cash flow from lower tax rates to buy back corporate stock. This could result in a long-term increase in value for remaining stockholders because there are fewer shares outstanding after the buy-back that may benefit from tax declines. But the buy-back itself does not create value.

Overall, it is likely that business values have increased by allowing owners to reinvest or keep the tax savings. The valuation of any business in times of flux is more difficult than in stable times. The 2008 stock market crash sparked numerous debates in the appraisal community regarding the impact on private company valuations, and the TCJA is providing even more fodder for meaningful deliberations. Ultimately, appraisers must consider the specifics of the new law and their impact as understood on the valuation date.

Using Past Earnings to Value a Business

When trying to decipher the impact on value for any business, a reminder about valuation fundamentals is important. The value of any business depends on expectations of future cash flows and the risk of achieving those cash flows. All valuations boil down to these two components. While some valuation techniques disguise this fact—for example, by looking solely at historical cash flow using a capitalization of earnings method—those prior earnings are really just a proxy for estimating future cash flows. Similarly, valuing a company using a multiple of earnings such as revenue or EBITDA (earnings before interest, tax, depreciation, and amortization) is really just another way of using past earnings to predict the future. (This may be a little less obvious, but a multiple is, in fact, equal to 1/capitalization rate).

For many mature businesses, prior years’ earnings are strong indications of what the company will do in the future, and we routinely use prior earnings to determine value. However, when circumstances change, can we use prior years’ cash flows to value a company? In the case of the tax law changes, the answer is not straightforward. We may be able to look at past earnings, adjust the prior federal income tax rates to the new rates, and come out with a solid indication of future earnings.

However, the TCJA changes are more complex than just a rate decrease. The modified deductions may require more detailed analyses on the impact of tax savings (e.g., an analysis of the taxes saved by accelerating fixed asset purchases), but more importantly, the changes in management behavior that the TCJA prompts must be taken into consideration. Then appraisers must apply the details of the tax law. Other factors, including changes to the market, must be considered as well. Will investors expect different returns? As the Federal Reserve raises interest rates, debt rates will rise for businesses. How will this impact behavior, cash flow, and value?

The complexity of these questions raises some doubt as to the usefulness of the capitalization of earnings method and reliance on prior transactions for valuation multiples. While neither method should be applied in a vacuum, both methodologies are still valid and can be used in the new tax environment, so long as care is taken to consider impact on value. For example, old market transactions that occurred before the TCJA may indicate a lower multiple of EBITDA than newer transactions. Evidence of new transactions may be scarce, but adjustments for tax savings can be applied and multiples adjusted for new expectations. A better method would be to look to multiples of public companies, which can be monitored in real time. Capitalization of earnings methods can be modified to take into account new laws and new behaviors by adjusting prior year cash flows for new expectations.

Capital Expenditure and Depreciation Changes

Under the TCJA’s bonus depreciation rule, businesses can expense 100 percent of certain depreciable assets acquired after September 27, 2017, and before January 1, 2023; from 2023 to 2026 the percentages expensed are reduced. Previously, these purchases would have been depreciated for tax purposes over a number of years. The new temporary bonus depreciation allows a business to apply 100 percent of the purchase price of these assets to reduce taxable income. As mentioned before, this may be a great incentive for businesses to make purchases in the next few years that they otherwise would have delayed or perhaps not made at all. Purchases not qualifying for the bonus depreciation include land, buildings, and real property improvements. The I.R.C. § 179 deduction has been temporarily raised to $1 million per year, phased out if more than $2.5 million of elected property is placed into service.

For valuation purposes, an appraiser may need to quantify the impact of the temporary change to depreciation rules, particularly for asset-intensive companies.

Pass-Through Entities

Pass-through entities such as S corporations, limited liability companies, and partnerships benefit from a single level of taxation at only the individual level. This contrasts with the treatment of C corporations, which are taxed both at the corporate level and then again at the individual level (i.e., as dividend income). There are a number of methodologies used in the valuation profession to quantify the difference in value produced by the single level of taxation.

With the decline in the corporate tax rate to 21 percent, but only a slight decline in personal tax rates, the comparison between the two entities changes in some pass-through models. In fact, the decline in corporate tax rates was large enough to raise concerns that pass-through entities would be taxed at a higher rate. The TCJA, therefore, includes a complicated method for adjusting the taxes paid by holders of pass-through entities so that their rates are competitive with C corporation rates. The qualified business income deduction (QBID) creates a 20-percent deduction of qualified business income through 2025. The following flowchart illustrates the complexity of applying the QBID rule. Note that QBID expires in 2025, whereas the corporate tax rate reduction is permanent.

Applying the QBID rule

Applying the QBID rule

For valuation purposes, a company’s status as a pass-through entity must be taken into account by applying appropriate tax rates and cost of capital for the entity’s status, or by applying a premium to value for the lack of double taxation. As previously mentioned, numerous methods deal with this problem, a hot topic in the valuation community. However, in addition to dealing with the one level of taxation for a pass-through entity, the temporary QBID must also now be quantified. Appraisers must be careful to determine whether the interest being valued can benefit from the QBID and, if so, determine the present value of the tax savings that can be expected for the years 2018 through 2025, as the law currently stands. Assuming that all pass-through entities will get a 20-percent reduction on taxes in perpetuity could significantly overvalue a business.

An interesting wrinkle relating to the QBID’s impact on family law valuations and personal goodwill has been raised by some experts. The QBID excludes pass-through entities with income above certain thresholds involving businesses whose principal asset is the reputation or skill of one or more of its employees. Note the similarity between this definition and the concept of personal goodwill. Personal goodwill is dependent on the reputation of an individual and in some states is not a marital asset. As the IRS refines the application of this exemption to the QBID, it may clarify exactly which industries rely on employee reputations and skills.

Will these newly codified definitions have an impact on previously debatable circumstances of personal goodwill? How will tax filings impact this determination? Time will tell.

Interest Deduction Limitations

Under the TCJA, certain businesses are now limited to deducting interest expense up to only 30 percent of adjusted taxable income each year; the remainder is available for unlimited carryforward, subject to the same limit. Interestingly, the definition of taxable income for establishing this deduction limit changes in 2022. Appraisers and management must take this limitation into account when valuing a business with high debt and high interest expense, or with low earnings where the limitation is easily met. Appraisers will need to quantify the impact of the limitation, but once again, behavioral changes must be considered. Will management lower the company’s debt structure because debt is a less advantageous method of funding the company, particularly as interest rates rise? Blindly carrying forward a company’s historical capital structure could overvalue a company by assuming the company remains highly leveraged, when in fact it will not be able to reap the same benefits of tax savings from debt in the future.

Net Operating Loss Changes

The TCJA also makes changes to the ability of a business to deduct operating losses. Previously, companies and individuals were allowed to carry back losses two years and carry forward twenty years. For losses generated in 2018 and thereafter (this change is permanent), companies and individuals cannot carry back losses (with some exceptions), and losses can be carried forward indefinitely, but they are limited to offsetting only 80 percent of taxable income. Losses generated prior to 2018 are not subject to the 80-percent limit. At the pass-through entity level, losses are limited to a threshold of $500,000 for joint filers, with excess losses carried forward and treated as part of the net operating loss carryforward.

An appraiser must take these limitations into account by projecting earnings for a company to determine how long it will take a business to benefit from any newly created losses. This will likely have the most impact on the valuation of early-stage businesses, as these entities tend to expect losses as they develop products or technologies before they expect to become profitable.


The full impact of the TCJA is still to be determined. The law was enacted hastily, the intent of the law and the language are unclear in many instances, and the details and implications will take time to unfold. IRS final guidance on the law was not issued until early 2019. Beyond that, challenges to the law and court decisions will keep the specific applications of the TCJA in flux for years. However, despite the uncertainty of some of the particulars, there are three key factors that can affect value to keep in mind:

  1. taxes must be calculated according to the new TCJA rules
  2. management decision-making may stray from prior norms and must be factored into cash flows, regardless of valuation technique; and
  3. many of the new rules sunset and should not be assumed into perpetuity.


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Marissa Pepe Turrell, ASA, CVA, is a director in the Advisory and Consulting Services division of Marcum LLP in Hartford, Connecticut. She specializes in the valuation of business interests for family law matters, shareholder litigation, gift and estate tax purposes, succession planning, equity buy-in and redemptions, mergers and acquisitions, and financial reporting.

Mark Harrison CPA, ABV, CFF, JD, is the National Advisory and Consulting Services practice leader at Marcum LLP. Over the course of his distinguished thirty-year career, his expertise has been sought out for highly complex valuation engagements. He has performed valuations of business interests for a variety of purposes, including family law matters, business damages, buy-sell agreements, shareholder litigation, estate and gift tax matters, buying and selling businesses, malpractice litigation, and breach of contract.