What are the potential tax implications of issuing senior notes for Snap’s balance sheet and shareholders?

Potential Tax Implications of Snap’s $500 million Senior‑Note Issuance

(Based on the Business Wire announcement of 7 Aug 2025)

1. Why the Issue matters for taxes

2. Direct Tax Effects on Snap’s Balance Sheet & Income Statement

2.1 Balance‑Sheet Impact

• Liabilities ↑: $500 M added to long‑term debt; equity (shareholders’ equity) is unchanged.
• Equity‑to‑Debt Ratio: Higher leverage may affect the effective tax rate if Snap becomes subject to higher state or federal “interest‑expense limitation” thresholds (see Section 3).

2.2 Income‑Statement Impact

• Interest Expense: The coupon (interest rate not disclosed) will be recorded as an expense each period.
• Tax‑Deductible: Under § 162 (ordinary business expense) the interest reduces taxable income line‑by‑line: [ \text{Taxable Income}{t} = \text{EBIT}{t} - \text{Interest Expense}_{t} - \dots ]
• Effective Tax Rate (ETR):
  [ \text{ETR} = \frac{\text{Income Tax Expense}}{\text{Pre‑Tax Income}} ]
  With a higher interest expense, the denominator shrinks → lower ETR, all else equal.

2.3 Potential “Interest‑Expense Limitation” (U.S. § 163(j))

• General Rule: Interest expense is limited to 30 % of Adjusted EBITDA (or 30 % of EBIT under the “excess‑interest” rule) for corporations with $1 billion+ net‑interest‑bearing debt. Snap’s total debt post‑offering (including existing borrowings) must be compared with that threshold.
• If the 30 % cap is triggered: Only the portion of interest within the cap is deductible; excess is carried forward. The $500 M issuance could push Snap into the capped regime, reducing the immediate tax shield but creating a carry‑forward deduction for future years.
• Exception for “qualified business purpose”: If Snap can demonstrate a qualified business purpose for the notes (e.g., financing a growth initiative), the limitation may be waived for a portion of the interest.

2.4 State and Local Tax (SALT) Implications

• State‑level corporate income tax generally mirrors the federal deduction, but some states cap interest deductions more aggressively (e.g., California’s “interest deduction limitation”). Snap, being headquartered in California, should anticipate:
  • Reduced state deduction if the state applies a lower cap (e.g., 25 % of taxable income).
  • Potential “nexus” adjustments for the private offering: If any of the notes are held by California residents, there could be state withholding on interest paid.

2.5 Impact on Deferred Tax Assets (DTAs)

• Higher interest expense → larger temporary differences (book vs. tax basis of interest).
• If the tax benefit is realized (i.e., interest is deductible now), no DTA is created.
  
• If a portion of interest is non‑deductible in a given year (because of § 163(j) or state caps), a Deferred Tax Asset will arise for the excess interest that can be carried forward.

3. Shareholder‑Level Tax Implications

3.1 For Snap’s Existing shareholders

3.2 For the note‑holders (the investors)

• Interest Income – taxed at ordinary rates for individuals; possibly at a lower rate for certain tax‑exempt entities (e.g., municipal bond‑like tax‑advantaged accounts if held there).
  
• Original‑Issue Discount (OID) – If the notes are issued at a discount or have a premium, the OID must be amortized over the life of the notes, creating an additional taxable component for the investor.
  
• Capital‑loss/ gain on sale – If a holder sells the notes before maturity, the gain/loss is treated as capital (short‑ or long‑term) and taxed accordingly.

4. Strategic Tax Take‑aways for Snap

5. Bottom‑Line Summary

1. Deductible Interest: The senior notes generate a steady, potentially large, tax‑deductible interest expense, lowering Snap’s federal (and, to a lesser extent, state) taxable income each year through 2034.
   
2. Tax Shield vs. Interest‑Expense Limits: If total debt (including the $500 M) pushes Snap over the 30 % EBITDA interest‑deduction limit under § 163(j) or state‑specific caps, only part of the interest may be deductible in any given year, creating a deferred tax asset for the remainder.
   
3. Balance‑Sheet Leverage: The increase in long‑term debt changes the capital structure; a higher debt‑to‑equity ratio may raise the cost of capital and could affect covenant‑related dividend restrictions.
   
4. Shareholder Effects:
   
   • Indirect – More tax‑shield = more after‑tax cash available for dividends or buy‑backs, which may affect shareholder value.
     
   • Direct – Shareholders may see lower EPS (if interest reduces net income) but could benefit from share‑repurchases or higher dividend payouts if cash permits.
     
   • Tax for Investors – The interest paid to note‑holders is ordinary‑income taxable in the year received (or accrued). If notes are sold before maturity, capital‑gain/loss tax rules apply.
     
5. Strategic Take‑Away: Snap should model the net‑after‑tax cash flow under various interest‑rate assumptions, test for the 30 % limitation both federally and at the state level, and incorporate the resulting deferred tax assets into its balance‑sheet planning. This will clarify the real benefit of the tax shield and its impact on shareholder value over the life of the notes.

Note: The discussion above is a tax‑policy analysis and does not constitute personalized tax or investment advice. Snap’s management and tax advisors should confirm the treatment with their tax advisors.