What Manufacturing & Distribution Companies Should Know About Tax Reform
Author: Rick Klahsen
The political climate in Washington, D.C., along with recent remarks from congressional leaders and White House officials, seem to indicate the environment is ripe for tax change in 2017 and beyond. Even so, there are differing opinions about these major issues:
- When legislative language would be drafted and introduced
- How the legislation will read
- If there will be efforts to garner bipartisan support
- If the reform legislation would be retroactive to the beginning of 2017
Resolving the many differences within the current political agenda may make tax reform difficult to accomplish.
Though there have been many tax reform proposals, those put forth by House Republicans and President Trump are most likely to heavily influence tax change with Republicans in control of both Congress and the White House. If we see tax reform, the House Committee on Ways and Means Better Way for Tax Reform Blueprint (House Blueprint) is a likely starting point. Further, recent statements from House Speaker Paul Ryan and House Committee on Ways and Means Chairman Kevin Brady indicate these efforts may already be underway. Although the two proposals provide insight into how tax reform may look, they aren’t yet fully developed—and legislative language will be necessary to understand how the concepts would operate. Read “Election Results May Lead to Tax Changes in the New Year” to learn more about these proposals and how they compare to current tax law.
Despite the facilitative political environment, it’s difficult to predict the possibility or substance of tax reform without detailed proposals given plenty of differing opinions. Even so, possible tax reform can affect you, and understanding potential outcomes is important for your tax planning strategy.
To help you navigate uncertainty surrounding tax reform, here are some key areas and planning considerations in the manufacturing and distribution industry that BKD’s tax professionals will be watching for in possible tax reform legislation:
- Trump and House Republican proposals generally call for lower tax rates on income from corporations and pass-through entities. See additional resources on our Tax Reform Resource Center for a closer look at how the proposed reduced rates compare to current tax law.
- Both proposals allow manufacturers to fully expense capital investment in both tangible and intangible assets. A key difference is the Trump plan only provides this incentive of immediate deduction to businesses engaged in U.S. manufacturing, the House Blueprint includes all taxpayers. This proposal would create a zero percent marginal effective tax rate on capital investment and eliminate the current depreciation system’s complexity. We’ll watch for proposal implementation specifics, including how full expensing interacts with current depreciation recapture provisions at ordinary income tax rates.
- The proposals eliminate the net interest expense deduction, i.e., interest expense in excess of interest income, with any interest expense not deducted carried forward indefinitely for use against future interest income. This proposed elimination would reduce the incentive for debt financing of business activities and capital investment.
- A destination-based principal is added to the House Blueprint’s proposed cash-flow tax system. This new principal is achieved through border adjustments and results in tax being imposed based on the place of consumption of goods and services, read: “Border Adjustment Tax Debate Heats Up.”
- The House Blueprint also calls for eliminating many “special-interest deductions and credits” affecting manufacturing and distribution businesses, such as the domestic production activity deduction. However, last-in, first-out inventory is currently retained in the proposal despite being the subject of cuts in recent House tax reform proposals.
- Both proposals include a repatriation tax on previously untaxed foreign earnings with future profits taxed as earned. This proposal would have the effect of eliminating the current tax deferral on this income.
- Implementing strategies such as accounting method planning on your 2016 tax return may lead to permanent tax savings. Understanding and analyzing your business is necessary to evaluate opportunities, given the complexity of the current proposals. Contact your BKD advisor to discuss tax planning strategies for tax reform.
While it’s still too early to predict the timing and substance of possible tax reform, reviewing your tax plan with your BKD advisor on an ongoing and regular basis will help prepare you for potential tax changes.