When the CARES Act was enacted, all the buzz from main street was about stimulus checks as well as PPP forgivable loans. Now that things have somewhat stabilized in the markets, there are two important changes related to the CARES Act that could immediately impact your business valuation.
When the Tax Cut and Jobs Act (TCJA) first passed, it required us to modify our models because TCJA limited NOL usage to 80% of taxable income. Prior to this, you could fully use your NOL balance in any year. In other words, the TCJA lowered the valuation of the NOLs because it would take longer to use them. Thus, time value of money dictates the longer the cash flow is received the lower the relative value. The CARES Act has temporarily removed this 80% limitation. The limitation comes back after 2020, but for all business valuations using NOLs incurred in 2018, 2019 or 2020, you no longer need to apply the 80% limitation to them. For companies in the technology sector or other industries who have experienced large losses, this is a very valuable change and your business valuation needs to reflect this modification.
Business Interest Deduction
Originally when TCJA was passed in 2017, business owners (with average 3-year revenue >$25 million) could no longer fully deduct the interest expense on their debts. The interest expense was essentially limited to 30% of your EBITDA through 2021 and 30% of your EBIT thereafter. Accordingly, we had to immediately change our valuation models to reflect this limitation. The CARES Act has modified the business interest deduction requiring us to account for and reflect this change in your business valuation. The limitation has been increased from 30% to 50% for 2019 and 2020.
These are the two primary considerations we have most directly included, but there are other considerations as well. The AICPA has documented some of these here if you’re interested in further refining your internal valuations.
Contact us today to start an assessment on your business valuation and see how the CARES Act has impacted you.