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Trump tax reform limit interest deduction high debt companies bear the brunt

December 23, 2017 at 00:06
source: In the gold net
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Summary
The U.S. tax reform bill is expected to be signed by the president soon, and the new rules will limit the tax credits on corporate debt interest. This means that a large portion of the $ 2 billion debt interest each year paid by Dell can no longer be tax deductible, and the tax bill is likely to rise further in the next few years.

Last year, just before Dell Technologies Inc. (DVMT) was close to its largest acquisition of tech companies in history, someone asked Dell chief executive Michael Dell if he woke early in the morning to find himself back nearly 500 What is the feeling of 100 million U.S. dollars of debt? His answer is: What do we in Texas do more than others.

Now Dell's debt costs really have to expand.

The U.S. tax reform bill is expected to be signed by the president soon, and the new rules will limit the tax credits on corporate debt interest. This means that a large portion of the $ 2 billion debt interest each year paid by Dell can no longer be tax deductible, and the tax bill is likely to rise further in the next few years.

A Dell representative said the company is still analyzing the impact of the tax reform act. An insider revealed that Dell hopes to acquire EMC Corp. To create a one-stop platform for sales of enterprise information technology, and the idea of ​​this transaction is built on the assumption that Dell's debt costs can be tax deductible.

Other speculatively-rated, highly indebted companies also face the awkward situation of a considerable portion of interest expense that may not be tax deductible. For a long time, due to the full tax deduction of interest expenses, enterprises are more likely to borrow instead of sell their shares when they need it. Some observers say businesses can become safer if tax reform allows companies to get away with the habit of debt issuance.

Nearly $ 15 Billion in Tenet Healthcare Corp. On Tuesday, restrictions on tax deductions in the tax reform bill could push it to trim its fiscal year profit forecast for FY18, but did not elaborate further. Reporter failed to contact Tenet spokesman for comment.

J.C. Penney Co. In its third-quarter regulatory filing with the Securities and Exchange Commission in November, it said that not allowing interest deductions could have a negative impact on its business performance and liquidity. A spokesman for the company said it is still too early to predict how much corporate tax credits will be affected. J.C. Penney credit rating for the speculative level, more than 4 billion in debt.

The tax reform will actually limit a company's deductible interest expense to 30% of Ebitda's interest income before interest and tax (EBITDA), with the excess taxable. If a company with 5%interest rateTo borrow $ 1 billion and debt interest expense is above the threshold of 30%, the annual tax increase will be $ 10.5 million, or $ 50 million in interest will be taxed at the new corporate tax rate of 21%.

This standard will also become more stringent: starting from 2022, the company's revenue benchmark used to calculate the 30% tax credit will not be able to eliminate the depreciation and amortization costs. This change means that the amount of revenue that can be included in the calculation is reduced, which in turn reduces the deductible interest.

The Congressional Joint Committee on Taxation estimates that interest deduction limits will bring about 171 billion U.S. dollars in taxes in the first 10 years and about 2070 billion in effect in 2022 Dollars.

Companies that incur high debt because of past deals may bear the brunt. For example, First Data Corp., which is rated speculative With nearly $ 19 billion in debt, this is 2007 KKR & Co. Leverage the consequences of the acquisition of the company. According to First Data, the latest quarterly filing with the Securities and Exchange Commission, the company's interest expense for the 12 months ended Sept. 30 was $ 964 million, up from 30% of Ebitda's $ 2.7 billion.

First Data spokesman said companies need time to fully understand all aspects of tax reform and financial impact.

                (Original title: Trump tax reform limit interest deduction high debt companies bear the brunt)

                (Editor: DF370)

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