Thought Leadership

Valuing Bonus Depreciation under the New Tax Law

By:  Joseph W. Thompson, CFA, ASA and David J. Neuzil, CFA, ASA

On December 22, 2017, President Donald J. Trump signed into law the Tax Cuts and Jobs Act of 2017. The Act provides businesses the ability to deduct capital expenditures as “bonus depreciation” for purchases of qualified property acquired and placed in service after September 27, 2017 and before December 31, 2026. This article will provide a framework for quantifying the value of bonus depreciation in the context of the discounted cash flow (DCF) method.

There are at least two ways to value bonus depreciation: (1) extend the discrete projection period of the DCF method in order to reflect the full impact of bonus depreciation or (2) conduct a traditional DCF method and separately analyze the impact on value of bonus depreciation. We recommend the second approach.

In this article, we present a model (referred to herein as the Thompson-Neuzil Model) that will permit analysts to conduct a traditional DCF method without the potential earnings and cash flow distortions that may result from the inclusion of bonus depreciation calculations in the projected financial performance of the subject company. The model permits the discrete quantification of the value of bonus depreciation, which may then be added to the value provided by the traditional application of the DCF method (or other valuation methods that do not reflect the value of bonus depreciation).

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