Structuring Mergers, Acquisitions, and Private

Transcript:Structuring Mergers, Acquisitions, and Private:
Structuring Mergers, Acquisitions, and Private Equity Recaps When the Target is an S Corporation NYU School of Professional Studies NYU Summer Tax Webcast July 24, 2020 Jerald D. August, Partner, Fox Rothschild LLP , Philadelphia, PA C. Wells Hall III, Partner, Nelson Mullins Riley & Scarborough, LLP, Charlotte, NC and Charleston, SC Structuring Mergers, Acquisitions, and Private Equity Recaps When the Target is an S Corporation Business Tax Provisions of the TCJA of 2017 2 Structuring Mergers, Acquisitions, and Private Equity Recaps When the Target is an S Corporations –TCJA Income Tax Rate Changes Before the Tax Cuts and Jobs Act (the “TCJA”), corporations were subject to graduated rates of income tax that resulted in a 35% corporate rate for taxable income over $10M, with a phase out of the lower rate for taxable income over $100,000. Certain personal service corporations were subject to a maximum rate of tax at 35%. The maximum rate of a corporation’s net capital gain was also 35%. The new law reduces the corporate income tax to 21% and repeals the maximum corporate tax rate on net capital gain as obsolete. 3 The 2017 Tax Act reduces the dividends received deduction (the “DRD,” in general, applicable to corporate shareholders receiving a dividend from certain domestic corporations) for the 70 percent and 80 percent brackets, to 50 percent and 65 percent, respectively, for taxable years beginning after December 31, 2017. The 100 percent DRD remains intact for dividends from affiliated group members. Section 245 provides for a 100% DRD from 10% owned foreign corporations and section 965 provides for a transition tax on foreign earnings reduces the tax cost of repatriating offshore earnings. 4 Structuring Mergers, Acquisitions, and Private Equity Recaps When the Target is an S Corporation - Dividends Received Deduction Structuring Mergers, Acquisitions, and Private Equity Recaps When the Target is an S Corporation - The Corporate AMT Prior to the TCJA, corporations were subject to the C-AMT to the extent that the tentative minimum tax exceeds its regular tax. The tentative minimum tax is computed at the rate of 20% on the AMTI in excess of an exemption amount AMTI is the taxpayer’s taxable income increased by certain preference items. A major item included in the corporation’s AMT base is the “adjusted current earning (“ACE”) adjustment. The ACE adjustment is equal to 75% of the amount by which adjusted current earnings of a