Tax executives are nonetheless planning for the impact
Editor’s Note: This survey was conducted before the Russian invasion of Ukraine.
A Grant Thornton survey of tax professionals found they are pessimistic about the potential for major legislative changes this year, but are assessing the impact and even adjusting their tax planning.
The low expectations for changes may not be surprising considering that the Build Back Better (BBB) bill and its sweeping tax title are currently stalled.
Nonetheless, tax law continues to be a huge concern this year, as Democrats have not abandoned plans to enact tax legislation this year. In addition, actions by the IRS and state legislatures have led to significant tax law developments recently and should concern most businesses.
To discover and quantify these concerns, Grant Thornton conducted a survey of tax professionals and C suite officers to learn which economic issues are top of mind. We share our findings here to show how readers’ tax concerns match those of their peers.
Different roles, different outlooks
Asking their outlook for the U.S. economy over the next six months, “Some optimism” was the most popular response, at 43%. “Some pessimism” and “Very pessimistic” together totaled less than 30%. There was a wide gap in the responses from different positions, though. While tax directors chose “Some optimism” at a 56.5% rate, CEOs and CFOs were less optimistic, with only 27.3% and 26.1%, respectively, viewing the economic outlook similarly.
A total of 55% of executives predicted “no” significant tax legislation would be passed this year, while only 20% said it would. Tax directors were slightly more optimistic than CEOs and CFOs, with 32.6% saying legislation would pass compared to only 4.3% for CFOs and 18.2% for CEOs.
Grant Thornton Chief Economist Diane Swonk noted the dispersion of responses from various job titles “reflects heightened uncertainty in a world where backlogs and costs of doing business are both rising.
“The dispersion also gets to how uneven the recovery has been,” she added. “Spending on big-ticket durable goods soared as financially secure consumers filled their homes to relieve the monotony of the quarantines. The service sector is still lagging and trying to recoup what was lost to the pandemic.” Recouping pent-up demand doesn’t have the same effect on the service sector as it does on the goods sector, though. “Vacations lost to the pandemic can’t be recouped.”
Swonk added that she thought tax professionals’ higher optimism about the economy is directly tied to the gridlock over the BBB and the decreased likelihood of tax increases this year.
The lack of significant U.S. tax legislation thus far might be expected to cheer tax executives worried about proposed tax increases, but the survey found they were very concerned about the failure of key priorities. The top tax legislative priorities of respondents centered around tax increases under the Tax Cuts and Jobs Act: the sunset of 100% bonus depreciation beyond 2022 (21.4%), postponing R&E amortization (17.3%), and postponing the addition of amortization and depreciation in the Section 163(j) interest limit calculation (9.2%).
The new rules for amortizing R&E expenses under Section 174 require these costs to be amortized over a period of five years instead of being expensed. This could reduce the deduction by as much as 90% this year. Our new story on R&E expenditures has more on this development and how businesses can prepare.
It’s important to keep in mind that if major tax legislation doesn’t pass, that doesn’t mean nothing is changing. There are significant built-in changes to the tax code that will affect many companies without legislation, as described in detail in our new tax planning guide for 2022.
International tax concerns
The response to a question about the most pressing international tax concern highlighted one concern that dominated others, global intangible low-taxed income (GILTI). Concerns about GILTI accounted for more than half the responses -- with 29.2% saying a country-by-country imposition of GILTI would have the biggest impact and an increase in the GILTI rate being the top concern of another 24%.
GILTI was a product of the overhaul of the U.S. international taxation rules from the Tax Cuts and Jobs Act (TCJA), and the failed BBB bill would have modified its application. Part of the overhaul directly reflected those concerns – the BBB introduced a country-by-country approach and also proposed reducing the Section 250 deduction, which would have created an effective higher GILTI rate. These changes are still favored by the Biden administration and could be the subject of separate legislation this year.
Respondents’ interest in the proposed GILTI changes is likely to continue give the recent Organisation for Economic Co-operation and Development (OECD) negotiated global tax agreement to implement a 15% global minimum tax. Over 130 countries, including the United States endorsed the deal in late 2021. The implementation of the rules in the various jurisdictions is slated to happen by Jan. 1, 2023, however, that timeline is far from certain.
The current U.S. GILTI system is likely not complaint with the OECD’s proposed framework due to various design differences including the country-by-country approach and applicable tax rate. The ability for the U.S. to align the GILTI system with the global framework depends on Congress’ ability to advance legislation making the necessary changes. The Biden administration has signaled that implementing the global deal is a significant priority, meaning changes to the GILTI system are likely to remain part of the discussion in any future legislative proposals.
SALT cap solutions
The TCJA’s “SALT cap,” which limits to $10,000 the deduction individuals can take to offset various state taxes, has long been a target for reform. While not included in the BBB, House Ways and Means Committee Chair Richard Neal, D-Calif., has stated adjusting or even repealing the deduction cap has been a concern.
Not surprisingly, when asked about the SALT cap, almost half of survey respondents indicated they want it eliminated completely, with a quarter wanting at least a doubling or tripling of the deduction. An even higher number of respondents working in pass-through companies agreed that a loosening of the cap was desired, with nearly 80% supporting raising or eliminating the deduction cap compared to 67.3% working at C corporations. This likely reflects that state taxes on pass-through businesses are often taxed at the individual owner level and are subject to the cap, while taxes on C corporation income are not.
Similarly, there was a good deal of agreement from respondents on the most challenging state tax issue for business. Almost half of respondents saw treating conformity inconsistencies of recent tax provisions as the most challenging issue for them, with other concerns somewhat evenly split. As with the SALT cap question, the C corporation/pass-through split was notable, with C corporations responding about 20 percentage points higher than pass-throughs on the compliance issues.
Jamie Yesnowitz, SALT leader in the Washington National Tax office, thought that respondents from public companies might be more attuned to state conformity issues given that many of these enterprises have broad presence throughout the U.S., possibly resulting in significant state corporation income tax liabilities. As such, these respondents may be directly responsible in ensuring that their companies comply with the non-uniform approaches taken by states in addressing recent federal income tax provisions contained in the TCJA and the CARES Act for purposes of their state corporate income tax filings.
Finally, when asked about employing environmental, social and governance (ESG) strategies through tax governance and transparency, most said this is still in its theoretical stage at their companies. Among respondents, 53.1% said their companies had not considered ESG in a meaningful way while only 8.2% had a comprehensive ESG strategy. A breakdown of those working in public v. private companies is instructive here. Only 35.3% of those in public companies indicated their businesses haven’t considered ESG strategies while nearly 60% of those working in private companies said the same.
Promoting ESG strategies may not seem to be an immediate concern for tax compliance, but that assumption is mistaken. Many federal and state programs incentivize a business’s philanthropic activities, such as the New Markets Tax Credit Program that provides a tax credit for businesses that invest money, through Community Development Entities, for low-income community projects. In fact, there are many significant credits and incentives for social and environmental activities. Leaning into opportunities to maximize credits and incentives has long been a staple of business tax management -- so it’s only a small step to adjust an entity’s tax strategy to align more closely with the entity’s ESG strategy. If, on the other hand, tax is not involved early and often in ESG efforts, businesses may find that many of the opportunities cannot be maximized or may even be largely unavailable.
What we do know is when a company’s tax organization is not involved meaningfully in a business’s ESG plan, it likely will impede a company’s ability to maximize credits and incentives, while increasing governance and compliance risks. Our survey reveals a concerning lack of progress in ESG strategy implementation – one that a business’s tax organization can, and should, play a meaningful role to correct.
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