When Dell Technologies bought data storage giant EMC Corp. last year, it took on significant debt, doing so in a tax system that has generally allowed Dell to fully deduct the payments it was making toward the interest on that debt.
But that system is about to significantly change.
After U.S. lawmakers passed a sweeping overhaul to the nation’s tax system this week, corporations will now be allowed to deduct only 30 percent of the interest paid on the debt they carry. However, experts say Dell and other companies will at the same time largely benefit from the lower corporate tax rates the bill provides.
“It’s a higher tax bill in its most simplistic version,” said Jason Pompeii, a senior director at Fitch Ratings, one of the nation’s largest credit-rating agencies. “There will be some adverse consequences for Dell with respect to interest deductibility.”
This month, Round Rock-based Dell reported that it still had $52.5 billion in total debt, mostly due to the EMC acquisition but also affected by the company’s privatization in 2013.
But while Dell will not be able to take advantage of full deduction on the interest it pays, the company is also essentially being allowed to phase into the worst part of the interest deduction changes, Pompeii said.
That's because the changes to the deductible amount of interest expenses will now be determined by EBITDA-- earnings before interest, taxes, depreciation and amortization -- until 2022. Any amount above the cap would not be deductible.
As a result, Pompeii said, Dell will essentially get to keep more of what it earns and therefore pay off more debt during the next four years than if calculations did not include depreciation and amortization. Other versions of the tax overhaul did not include that phase-in.
In an op-ed published by The Hill on Dec. 11, Dell CEO Michael Dell had called on lawmakers to include depreciation and amortization in the calculations.
In a written statement on Wednesday, Dell spokesman Dave Farmer said the company is “pleased that the interest provisions were changed to reduce the adverse impact to Dell and similarly situated companies.”
Before the latest changes to the business interest deduction, Tom Vallone, senior vice president of global tax at Dell, had told the Wall Street Journal that the company would take a $200 million hit each year at a 20 percent tax rate were that tax measure approved by Congress.
Companies like Dell will also benefit from a tax overhaul that experts have said is generally business-friendly. The top corporate tax rate, for example, will be lowered from 35 percent to 21 percent, a significant reduction that will allow companies to keep more of their earnings.
If Dell strongly attacks its debt as it has been doing, then the exclusion of depreciation and amortization could matter little by 2022, Pompeii said. Dell reported this month that it has paid down $9.7 billion in gross debt since its purchase of EMC.
“We think that their execution and their managing of the legacy storage business there is more of an issue than the tax bill,” Pompeii said. “Their success right now hinges more on executing their plan than tax reform.”
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