Topic of the Quarter
Time is Running Out to Reverse Collateral Damage of the Tax Cuts and Jobs Act of 2017
A new proposal dubbed is underway to roll back certain business-related tax policies, which have had significant financial implications for U.S. companies. The bill aims to reverse specific provisions of the Tax Cuts and Jobs Act of 2017, whose policies have inadvertently increased the tax burden of tech and engineering-reliant companies to potentially insurmountable levels. The new bill will address three key areas: R&D expensing, interest deductibility, and depreciable asset expensing.
R&D Expensing: The new bill allows businesses to instantly deduct their U.S.-based R&D investments (including software) instead of spreading the deduction over five years, as previously required by the 2017 TCJA. This change reinstates the ability for immediate expensing, potentially resulting in significant savings for businesses. Additionally, it offers the opportunity to amend losses incurred by the TCJA provision from past returns for expenditures made between 2022 and 2026.
Interest Deductibility: The bill will reinstate the original definition of adjusted taxable income (ATI) to tie it back to EBITDA rather than EBIT. The latter, enacted by the TCJA, proved ineffective in the face of continuous interest rate hikes. The new bill provides increased flexibility for those forced to borrow at higher interest rates to meet their payroll obligations or scale their business.
Depreciable Asset Expensing: The TCJA initially allowed full expensing of certain qualified property placed in service between September 27, 2017, and before January 1, 2023, with bonus depreciation decreasing annually thereafter. The new bill restores 100% bonus depreciation for 2023 and 2024, extending it through 2025 without changes for subsequent years. Bonus depreciation will be limited to 20% in 2026 and eliminated in 2027, with extensions for property with longer production periods. The expansion of bonus depreciation is likely to further enhance a taxpayer’s capacity to deduct business interest, as the bill alters the definition of ATI.
The bipartisan tax framework, unveiled amidst a mix of social measures, has significant ramifications for U.S. businesses. Although aiming to promote American innovation, it has sparked divisive opinions in the Senate, contrasting its smooth passage through the House earlier in the year. Congress’ two-week work period beginning this week marks the bill’s last real hope, as the likelihood of its passage sharply diminishes once the tax filing deadline passes. It is speculated that its fate remains uncertain, as a number of senators are lining up to oppose it. Tech executives and finance professionals should seek professional advice as they navigate the uncertainties and developments regarding tax policy over this next year.
Founder-Led / Bootstrapped Deal Activity Snapshot
Q1 2024: Notable U.S. based M&A deals in Tech
Autonomy/IoT
3/14 – Traffic Technology Services, automated vehicle assistance applications, acquired by Miovision via Maverix Private Equity. Link
1/15 – Aerovel, unmanned aerial systems for long-range imaging, acquired by Airbus Group [PAR: AIR]. Link
1/8 – Cohda Wireless, connected autonomous vehicle communication technology, acquired by Danlaw Telematics. Link
Big Data & Machine Learning
3/20 – Orgnostic, human capital analytics platform, acquired by Culture Amp. Link
3/19 – Lilac, open-source data understanding and manipulation software, acquired by Databricks. Link
1/24 – CloudMade, ML platform for connected car analytics, acquired by Stellantis [NYS: STLA]. Link
1/22 – Vertical Knowledge, dynamic data, insights and intelligence software, acquired by Babel Street via Veritas Capital. Link
1/16 – Flow Security, data security detection and response platform, acquired by CrowdStrike [NAS: CRWD]. Link
1/8 – KnowledgeHound, survey data management and analytics software, acquired by YouGov [LON: YOU]. Link (KnowledgeHound advised by La Honda Advisors)
Data Center
3/5 – DPGaurdian, products and services for critical data center environments, acquired by Data Clean. Link
1/31 – DDC Cabinets, data center cabinet and cooling solutions, acquired by Thompson Street Capital Partners. Link
1/3 – TMGcore, single-phase and two-phase liquid immersion cooling, acquired by Modine [NYS: MOD]. Link
Software
3/6 – Channel Mechanics, cloud-based channel enablement platform, acquired by Allbound via Invictus Growth Partners. Link
3/4 – TripShot, fleet tracking and optimization software, acquired by Transit Technologies via PSG. Link
2/8 – Flexis, supply chain and intelligent manufacturing software, acquired by Blue Yonder. Link
1/30 – Reblaze, cloud-based security platform, acquired by Link11 via Pride Capital Partners. Link
1/11 – Safe Software, spatial data transformation software, acquired by JMI Equity. Link
Professional Services
3/19 – Twenty20 Solutions, security and automation services, acquired by Epic IO via Capital Southwest. Link
2/29 – GalaxE.Solutions, IT consulting and security services, acquired by Endava [NYS: DAVA] for $405mm. Link
2/13 – Aggne, IT consulting and managed services, acquired by Wipro for $66mm. Link
1/23 – Spalding Consulting, IT services catering to the Department of Defense, acquired by Saalex for $75mm. Link
1/11 – STA Group, IT consulting services, acquired by Freelance.com [PAR: ALFRE]. Link
eCommerce
3/18 – Goli Nutrition, D2C nutritional products and supplements, acquired by Group KPS via Bastion Capital. Link
3/14 – CQL, digital eCommerce agency, acquired by Superstep Capital. Link
3/7 – CARiD, online retailer of car parts, acquired by Fifth Star for $35mm. Link
2/2 – The Honey Pot, manufacturer and online retailer of feminine products, acquired by Compass Diversified [NYS: CODI] for $380mm. Link
