Circular Money & The U.S. Tax System

Listening to a financial radio station today I heard something that caused me to say…”what?” Here’s the outline:


First the Cash Source: China has gobs of U.S. dollars that they get from selling us incredible amounts of stuff. China is catching heat for owning so much U.S. Treasury debt, so they want to use the US Dollars for something other than lending it back to the US Treasury. So why not loan it to U.S. companies?


The Use of Cash: A big U.S. company, that will remain nameless, pays 1.8% dividend on it’s stock. Note, this is important …Dividends for biz are not tax deductible, meaning companies pay dividends after they pay their tax obligations.


So what to do? This company borrows US Dollars at 1.7% interest from China. The 1.7% interest is tax deductible which means the effective cost of the interest is about 1.2%…and remember the effective cost of dividends is 1.8% because dividends are not tax deductible. So the cost to the company for borrowing from China is 33% cheaper than the dividend cost.

The solution, borrow US Dollars from China, deduct the interest from taxes and use the cash to buy back the stock which eliminates the 1.8% cash dividend cost and replaces if with an effective $1.2% cash cost.

Incredible but true, another case of the perverted U.S. tax code. Borrowing is more tax effective than returning cash to shareholders as dividends.

 

Mr. Elliott is Managing Director of Sunbelt Texas Business Sales & Acquisitions with more than 20 years experience in mergers, acquisitions and business broker. Mr. Elliott purchased Sunbelt Houston in 1996 and has managed the sale of over 500 companies from very small businesses to companies with revenue of more than $30,000,000. Mr. Elliot has provided Business Broker and merger and acquisition adviser services to privately held business in Houston, Austin, San Antonio and throughout Texas.


Over a 20 year career, he has handled a wide range of industries including manufacturing, distribution, medical, machining, construction, and contractors. Mr. Elliott has completed transactions with Private Equity Groups, strategic buyers and a wide range of regional companies executed plans to grow through acquisitions.

Mr. Elliott has been recognized as a “Thought Leader” by Sunbelt Business Brokers Global Network. Mr. Elliott is frequently interviewed in various media and is considered an expert in the field of buying and selling privately held businesses.

Mr. Elliott has received the professional designations of Certified Business Intermediary (CBI) and Master Merger & Acquisitions Intermediary (MMAI).

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