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Author: Andrew MacLeod

The Use of Leverage in Portfolio Companies – The Rules Have Changed

Subject to certain exceptions1, historically under the Internal Revenue Code of 1986, as amended (the “Code”), there has generally been no limit on the deduction of business interest.    However, the newly enacted Tax Cuts and Jobs Act (the “Act”), has fundamentally changed the business interest deduction. For a private equity fund and other taxpayers preparing financial models, it is important to consider the new limits on the deduction of business interest under the newly enacted Section 163(j) of the Code and other changes under the Act to accurately forecast the anticipated cash flow and the impact of the Act on a business or in connection with any potential acquisition.  Starting in 2018, the new rules governing business interest under the Act have full and immediate effect, and do not grandfather any pre-existing debt. Under new Section 163(j) of the Code, the business interest deduction is now generally limited to 30% of the taxpayer’s “adjusted taxable income”.  A taxpayer’s “adjusted taxable income” is equal to a taxpayer’s taxable income as determined without taking into account: i.     any item of income, gain, deduction or loss which is not allocable to a trade or business; ii.    any business interest income or expense; iii.   any net operating losses; iv.   any deduction under the newly enacted “qualified business income deduction” under Section 199A of the Code; and v.    solely for tax...

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I Assumed What?!? You may have bought the Seller’s State Tax Liabilities.

Most savvy purchasers of a business prefer to acquire the underlying assets of a business over its equity. Although there can be a multitude of reasons for a purchaser to prefer an asset purchase, one of the more common justifications is the avoidance of the historical liabilities associated with the seller’s business.  As a result, a purchaser typically takes great care in drafting a purchase agreement to specifically disclaim any liability and responsibility for the historical tax liabilities of a seller.  In doing so, a purchaser can avoid any liability with respect to the historical state tax liabilities of a seller, correct?  Unfortunately, it is not that simple. Notwithstanding the terms of a well-crafted tax liability allocation and disclaimer provision in a purchase agreement, in a number of states as a matter of state law, a purchaser may nevertheless be liable for the historical state tax liabilities of a seller. Of course, a purchaser may have the indemnity provisions in the purchase agreement to rely upon, however, an indemnity provision still has to be enforced and may not have much value if there is no readily available source of recovery or if the seller is not creditworthy. Although liability for a seller’s state tax obligations can be draconian, fortunately, most states provide a mechanism to avoid successor liability. Typically, this involves requesting tax clearance from a state and/or placing...

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Tax Blog is published by Dickinson Wright PLLC to inform the public of important developments within the firm and practice areas. The content is informational only and does not constitute legal or professional advice. We encourage you to consult a Dickinson Wright attorney if you have specific questions or concerns relating to any of the topics covered in this blog.

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