What is the impact of the recent tax reform and how does it affect businesses?
After decades of debate, late last December, Congress enacted major U.S. tax reform for the first time since 1986. The massive, far-reaching bill includes $5.5 trillion in tax cuts, $4 trillion-plus in tax increases, and a complete overhaul of how many businesses will be taxed.
Businesses continue to sort through the impact of this reform. The headline grabber may have been the reduction in the corporate tax rate—which at 21 percent is now in line with the rest of the industrialized world, versus the previous marginal rate of 35 percent. But this reform package goes far beyond a rate change and will require modifications that could be felt throughout organizations for many years to come. In fact, some reforms could eventually lead to transformations of business structures and operations.
A change of this scale and scope means that understanding and applying the new law will challenge the tax community now and in the future, as these new rules are interpreted and implemented by Treasury/IRS. But for the non-tax professional the challenge may be even greater. You will need to determine what the intent and spirit of the law means to your business, how to communicate the law’s impact to key stakeholders, and how to implement the law in terms of financial statements, tax provisions, and even employee compensation.
Businesses face important decisions in responding to these changes. It’s become clear that differently situated sectors or companies will be impacted in diverse ways, depending on their structures or lines of business.
Consider a multinational enterprise or one involved in overseas manufacturing or import-export. The organization will need to address how it may make use of repatriated overseas profits and take into consideration the operational impact of the U.S.’s move from a worldwide to a territorial tax system.
Many companies in the Columbus area will feel the impact of the immediate expensing of capital expenditures. For some, that change will be positive; for others, approaches to financing may need to be re-examined and perhaps revised.
In the near term, leaders of multinational and domestic enterprises will be faced with several must-dos:
1. Determine how some of the law’s “give backs”—for example, the loss of deductions related to interest, manufacturing or like-kind exchanges—in tandem with the rate changes will impact your current and deferred taxes and how to communicate that impact to your board, investors, analysts, and employees as that information is reflected in your financial reporting.
2. Prepare for questions related to what plans might exist for any upside in operating cash flow that may be created
3. Communicate to your key stakeholders how the sweeping law changes may affect the business or the stakeholders themselves.
4. Take steps to assure that technology systems across your organization align with the new regulations’ requirements.
In the longer term, as boards and business leaders gain a clearer picture of how their enterprises fit into the new tax landscape, these tax reforms could be transformational for many businesses. For example:Some companies might use enhanced cash flow to expand their merger and acquisition (M&A) activity—or now have the resources to consider M&A for the first time. Leaders may take a fresh look at how and where their companies invest or conduct some of their back office or administrative activities. Others may explore adjusting their value chains and developing more U.S.-based manufacturing or operating units. Given the now very favorable corporate tax rate of 21 percent, some “pass-through” businesses may consider incorporation for the first time for all or part of their operations, thereby shifting the structure of some businesses.
These and other possible disruptions could continue to put pressure on finance, tech, and even HR departments. But the changes also signal exciting times ahead for leaders at businesses of all sizes.
Brian Campbell is a Columbus-based Partner in KPMG’s LLP’s Business Tax Services practice, with more than 23 years of experience providing tax consulting and compliance services to both publicly and privately held corporations, many with international operations.