Until recently, there were only two certainties in life. For now, it appears that one of those is actually not so certain. Though taxes aren’t going away, tax reform is at the top of lawmakers’ agenda. We’re looking at a historic opportunity for major tax reform in the next 12 months, and it’s time for trucking and logistics companies to understand what is transpiring in Washington, D.C. If you don’t get ready, you may miss out. The plans for reform are not final, but there are important reasons not to wait to act. 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 will require significant planning that should start now. Before you act, the first step should be understanding the proposals and how they would affect your business.
Two official tax plans have been released, one from the Trump administration and the other from House Republicans. The president’s plan has few specifics while the House plan provides more details. The plans have their differences, but there is some consensus on certain items that help project what tax reform may look like, and it’s going to be “huuuge.” Both plans propose to slash rates, repeal many business and individual benefits, and repeal the alternative minimum tax (AMT). The House plan also proposes full expensing of asset purchases but would disallow interest expense, two points mentioned in Trump’s campaign proposal, but not specifically addressed in his tax reform outline. For more details on the two proposals, please see the comparison chart attached.
Tax cuts sound great, right? But someone has to pay for them. Many business tax benefits and most itemized deductions, including the individual deduction for state and local taxes, may be on the chopping block. The House has also proposed making business taxes border adjustable, meaning imports could not be deducted while export revenue would not be included in taxable income. The trucking industry should be particularly concerned about the future of certain tax credits and like-kind exchanges. Companies losing important tax benefits may not benefit from tax reform, even with big rate cuts.
Once you understand the potential impact, you should begin to focus on preparing for the potential ramifications. In the short-term, companies should consider tax strategies to implement before tax reform is passed, the impact tax reform will have on financial statements, and the potential impact on cash flow forecasts and operations.
There are many planning opportunities that may be advantageous to pursue before tax reform is in effect. The prospect of a rate cut means you should be accelerating deductions this year and deferring income into future years when rates might be higher. Did your company historically pass on a tax savings opportunity because the items discussed were only temporary differences? This year is an opportunity to turn a timing benefit into a permanent change. Companies should consider the tax benefit or cost on the timing of equipment purchases, the election in or out of bonus depreciation, and the opportunity to accelerate depreciation on terminals and warehouses, as well as tax accounting method reviews.
Tax reform may also affect your financial statements. The impact of legislative changes must be recorded in financial statements in the period of enactment. A change in tax rates would lead to a revaluation of deferred tax liabilities and deferred tax assets as a whole. Full expensing of asset purchases would greatly increase the deferred tax liability for fixed assets, as there will be no new tax basis added to the deferred balance. The repeal of the alternative minimum tax may also eliminate any deferred tax asset a company has for AMT credits. As deferred taxes are revalued, there could be potential impacts to the recognition of valuation allowances and to bank covenants. Companies should identify risks from the proposed changes and analyze the potential impacts of tax reform on financial statements.
A critical area to consider from a short-term perspective is cash flow consequences. Careful analysis and planning for the potential impact of tax reform to your future cash flow must be completed to avoid surprises. There is a good chance that legislation may change the way companies operate. Some items on the agenda, like the border adjustment tax and elimination of like-kind exchanges would affect some companies more than others. Your analysis should include how tax reform will affect operational decisions and the risks involved:
- How will the elimination of like-kind exchange rules and interest limitations affect equipment purchases?
- Will you retain revenue equipment longer if gains cannot be deferred and interest expense is disallowed?
- Will alternative methods of acquiring equipment need to be considered (i.e., lease vs. buy)?
- How does full expensing fit into this puzzle?
- Should you accelerate large purchases before tax reform becomes effective?
- How will financing assets that do not benefit from full expensing, such as land and stock acquisitions, be affected by tax reform?
Companies should also have an eye on long-term items that may be affected by tax reform. Changing tax rates could affect the company’s entity choice.
- How will corporate tax rates compare to pass-through tax rates after tax reform is enacted?
- Will reforms, like border adjustments or other changes to our international tax law regimes, shift the company’s strategies for global supply chains and target markets?
- What impact would these changes have on capacity?
- How will reforms affect your ability to finance equipment purchases, real estate acquisitions or mergers?
There are lots of unknowns that may need to be considered as the tax reform picture becomes clearer. However, discussion of these items should be held now to identify areas of interest for the future. Most companies likely do not have the answers readily available for all of these questions. You should consider properly modeling the effect of tax reform now in order to best prepare for the short-term and long-term impacts. This could be a “once-in-a-generation opportunity” to maximize the benefits of reform.
For information on how tax reform could affect you, contact Transportation Sector Leader Russell Norris
at +1 704-632-6897.