Time is now for manufacturers to plan for tax reform

Time is now for manufacturers to plan for tax reformFaced with a real opportunity to enact major tax reform, companies are cheering from the sidelines as they remain optimistic about the business climate. Despite a myriad of political setbacks, meaningful tax reform legislation is a real possibility this year.

During a recent webinar, “The Outlook for Tax Reform in 2017,” National Association of Manufacturers (NAM) and Grant Thornton tax specialists offered advice on what businesses can do now to best position themselves for anticipated changes to the tax code.  Panelists agreed that companies can’t afford to sit back and wait for the legislative process because many planning opportunities must be implemented or planned before tax reform becomes effective.

The time is now

 “We have the best opportunity in as much as 30 years to advance pro-growth, pro-manufacturing tax reform,” said Dorothy Coleman, Vice President of Tax and Economic Policy for NAM.

The factors driving reform, in Coleman’s view, include a complex and outdated U.S. tax code, the highest corporate tax rate among major nations, uncompetitive trade rules, and concerns about the national deficit. Plus, businesses, the GOP-controlled Congress and the White House all support tax reform, she said.

“Our advice to our members: Stay engaged,” Coleman said. “This could speed up really quickly. It could take longer than we thought. But I think the fact remains that the administration, Congress and the business community remain very interested in tax reform, and we definitely feel that the time is now.”

Key reform proposals

The best indicator of what tax reform could look like comes from the House Republican blueprint titled, “A Better way for Tax Reform.” It was released in June 2016, but remains the most substantive proposal to date, Coleman said.

For individuals, the House plan would reduce tax brackets to three: 12%, 25% and 33%. Capital gains, dividends, and interest income would be taxed at ordinary rates after a 50% exclusion, for a top effective rate of 16.5%. Most itemized deductions would be eliminated, except mortgage interest and charitable donations. The estate tax would be repealed.

For businesses, the GOP blueprint calls for lowering the corporate tax rate to 20%. The top pass-through rate would be 25%. There would be full expensing of capital assets, a deduction for wages and salaries, but no deduction for interest expense.

House Republicans also are calling for a shift from a worldwide tax system to a “territorial” system which would exempt foreign income from U.S. tax with a 100% dividend deduction.

Companies would further be encouraged to bring their foreign-held earnings back to the U.S. through a mandatory repatriation. Under this plan, a one-time tax would be imposed on all foreign-based earnings held by U.S. companies. The GOP Blueprint calls for an 8.75% tax on cash and cash equivalents, such as stocks and bonds, and 3.5% for non-cash assets.  

The Senate has started work on its own tax reform plan, but the general consensus is that it would take a more traditional approach, lowering rates but taking more moderate steps for other reforms. As for the White House, it supports lowering the corporate rate to 15%, and also favors a territorial tax system and a one-time repatriation of foreign earnings. It would eliminate most business tax incentives.

Another option would be what Coleman calls “tax reform lite,” moving forward with a smaller bill that would reform some parts of the code, such as simply lowering tax rates.

“Our preference at the NAM is to do the whole thing. The tax code is very integrated. You make one change, and it affects other parts of the code,” Coleman said. “I think amending just parts of the code would be very difficult.”

Planning ahead

While there is great uncertainty over how tax reform will progress, businesses should still take some measures now in anticipation of future changes, said Dustin Stamper, Director of Grant Thornton’s Washington National Tax Office.

“Sometimes the instinct of companies is to see how things shake out and then take action. I think that’s a mistake. You can’t take a wait and see approach and put your company on hold,” Stamper said.

There are important reasons to act even before we know the final outcome of legislation. . First, many business decisions you make now will have a long-term economic impact that could change under tax reform. More importantly, tax reform will create powerful new planning opportunities, many of which need to be implemented before tax reform is effective or require significant planning that should start now. The first step should be running models to see how the various tax reform plans might affect their business.

"Sometimes the instinct of companies is to see how things shake out and then take action. I think that's a mistake. You can't take a wait and see approach and put your company on hold."While the final outcome is uncertain, companies can do some planning by predicting what reforms are most likely to take place, and which ones are on the bubble, Stamper said.

The mostly likely proposals to survive are some type of rate cut, a loss of some special credits and deductions, a one-time tax on repatriated earnings, and a shift to a territorial tax system, Stamper said. On the fence is a proposal for full expensing/loss of interest deduction, while least likely to survive is the border adjustment tax, Stamper said.

Under that scenario, manufacturers should engage in some “rate arbitrage,” by accelerating its deductions into this year when rates are higher, and deferring its income into next year when rates are lower, Stamper said. Companies can turn timing changes from things like accounting method reviews and fixed asset studies into permanent benefits in advance of a rate cut.

“The good news about these strategies is that there is often very little downside,” Stamper said. “Even if there is no rate cut in the end, companies still enjoy the cash flow benefits and time value of money.”

Other items for consideration include trying to forecast the impact of mandatory repatriation and a border adjustment tax; whether to wait for full expensing on large capital purchases; load up on long-term debt that would be grandfathered; and renegotiate import agreements to benefit from any currency valuations.

“The idea is to be flexible,” Stamper said. “Be ready to act as soon as we know more.”

Learn more:

Dustin Stamper
Director, Washington National Tax Office
T +1 202 861 4111

Brian Murphy
National Managing Partner – State and Local Tax
T +1 312 602 9017

Jeff T. French

National Managing Partner, Consumer and Industrial Products
T +1 920 968 6710