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Lawmakers are considering an overhaul of the tax code next year that could sharply reduce tax rates and fundamentally alter the treatment of debt and capital expenditures.
Business groups have been clamoring for a tax revamp for years, and some are confident that all the forces have coalesced to make it possible in 2017.
“The chances for a fundamental tax reform are a lot better than they have been for a very long time,” Joe Pari, national principal-in-charge of KPMG LLP’s Washington National Tax Practice, told Bloomberg BNA.
Companies could face a much different tax code in 2018—when 2017 legislative changes would likely become effective—than they do this coming year. That means companies should be making decisions so they can be as nimble as possible, said Linda Carlisle, a member at Miller & Chevalier Chartered.
Corporations also have to gamble on what changes being discussed now are likely to make it to the president’s desk and adjust their own tax strategy to account for that. Here are five actions that many large corporations are considering as they weigh the likelihood of tax overhaul.
Foreign tax credits, or nonrefundable credits for the income taxes paid to a foreign government, would be less valuable if companies are able to repatriate overseas earning at a lower rate.
Currently, companies have to pay a 35 percent tax rate on all earnings worldwide. House Republicans have proposed cutting the tax on corporate assets abroad to the single digits and shifting to a territorial tax system, meaning companies would have less income to use the credits against.
“Companies are taking a deep look now at all the things they need to do to use them,” Pari said.
Companies should also hold off on repatriating, because the regime is “almost certainly” going to be better in the future than it is today, said Robert Willens, an independent tax consultant in New York.
Like foreign tax credits, many deductions will be worth comparatively less if tax rates drop to 20 percent, which the House has proposed.
Any company with deferred tax assets on its books needs to look at how tax overhaul would affect their financial statements, Pari said.
“In a world with higher tax rates versus lower tax rates, when the rates go lower, you may need to revalue those deferred tax assets and have an adverse impact to your financial statement because the rates went down,” he said.
Companies are also looking at accounting method changes that accelerate deductions and defer income, Pari said. Companies that are looking to sell an asset may want to do so in an installment sale to receive some of the payments later in what could be a lower-tax environment, he said.
The House Republican tax plan would allow for full and immediate expensing of machinery and equipment. Under current law, companies have to depreciate the asset and can deduct a portion of the cost of that equipment every year.
If companies can delay purchases until 2018, they might be able to fully deduct the cost of that equipment.
“Deferring capital outlays makes a lot of sense unless you absolutely need to get machinery in house immediately,” Willens said.
The House GOP plan eliminates the deductibility of interest expense, but is expected to grandfather in existing debt so that taxpayers can still deduct the interest on those loans.
Companies should look ahead to see what debt they might want in the near-term future, because it could carry a benefit that future debt might not, Carlisle said.
“If you’re not at the table, you will be on the menu,” Carlisle said.
The window for influencing the legislation is closing as House Ways and Means Committee Chairman Kevin Brady (R-Texas) seeks to wrap up the project in the coming months. Brady has said he wants to have a bill ready to release should President-elect Donald Trump want it in the first 100 days of his term.
Brady has committed to retaining some of the provisions disliked by some industries, such as the taxes on imports, but has continued to encourage taxpayers to discuss how the plan could address their concerns. However, that window of time could be narrowing as Ways and Means Republicans seek to prepare a bill for markup.
“Fasten your seat belts,” Carlisle said. “It’s going to be a bumpy ride.”
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