The below article was published in November 2017. Please see "U.S. Tax Reform Is Law ... Now What?" for our perspective on how the final bill pertains to taxable entities, how it affects valuations, and what unknowns still linger.
House Republicans recently unveiled their long-awaited plan to restructure the tax code. The Tax Cuts and Jobs Act endeavors to rewrite tax policy for the first time since the Reagan administration. While the policy is far from final, we, as valuation experts, have a particular interest in how the proposed legislation might affect business values.
What Is Proposed?
How Might Values Change? (The Easy Stuff)
The value of a business enterprise depends primarily on its capacity to generate after-tax earnings and cash flows. To a degree, the likelihood of tax reform is already reflected in the stock prices of publicly traded companies. The full value impact from tax reform will be observed only when new legislation is ultimately passed (or not). Thus, below we focus on the Income Approach effects if the proposed legislation were signed into law.
How Might Values Change? (The Hard Stuff)
Intuitively, higher earnings due to lower taxes would lead to appreciation in business values. However, the valuation process is complex, and it requires consideration of cause and effect. Of course, the effect of tax reform is the great unknown, as any new tax plan could have broad-reaching implications and unforeseen consequences on the domestic and international landscape. While answers are scarce, questions abound, including: