At Alvarez & Marsal, Taxand USA, we see two important issues notably missing in the public discussion over the release of the Tax Cuts and Jobs Act. One issue pertains to investors and the other to tax leaders.
For Investors and Stakeholders: How Will Valuations Change?
There are at least two ways tax reform could significantly impact business valuations. Besides affecting future after-tax cash flows, tax reform means companies will also be immediately adjusting their financial statements.
Many companies have significant balance sheet items relating to tax, aka deferred tax accounts. For example, a net operating loss carry forward would be a typical large balance sheet asset. Companies value these deferred tax items using the income tax rate expected in the year of utilisation. Hence, changes in enacted tax rates will consequently cause account values to change. If corporate rates decline, so will deferred tax asset and liability balances.
Companies ought to be modelling the impact of potential reform immediately — first to determine the impact on valuations and second to avoid financial statement delays early in 2018. You need a trusted source of information and analysis to monitor and digest the constantly evolving tax reform environment in the coming months.