Under a Trump presidency and a Republican-controlled Congress, corporate tax reform is widely considered to be inevitable. The big questions surround what will change, how soon, and whether companies should alter any tax planning or compliance activities as a result.
The biggest priority right out of the gate—given how Trump harped on tax reform as a priority during his campaign—is a likely overhaul of corporate and individual tax rates and provisions, says Marc Gerson, vice chair of the tax department at law firm Miller & Chevalier. Meanwhile, House Republicans have been working on legislative language since mid-2016, and the differences between the key principles of their respective plans are not significant.
“That creates a window of opportunity to have a comprehensive tax reform discussion in 2017,” says Gerson. He’s predicting significant reduction in both corporate and individual tax rates and significant changes to international taxation, especially on corporate earnings abroad and repatriation provisions. “Those are the lynchpins,” says Gerson. “There will be a lot of energy behind moving something.”
While Republicans now wield a lot of control, they will still have to contend with Democratic resistance in the Senate, experts say. That presents lots of possibilities for what a tax reform package might look like and how Republicans might go about working to get their way.
The most direct path to tax reform would be to use the “reconciliation” process to get a bill through the Senate, which would facilitate passage even without Democratic support. “That could prove difficult for political, substantive, and procedural reasons,” says Jon Traub, managing principal in tax policy at Deloitte.
Companies will likely cheer the prospects of corporate tax reform, says Jeff LeSage, vice chairman in tax at KPMG, but the complexities of a potential plan and the political obstacles that could still complicate the process should give companies pause before celebrating. “Even though the stars may be aligning, many things could still derail the process,” he says.
That’s likely frustrating to corporate CFOs, who generally seek clarity on corporate tax policy after an election, says Traub. “Regardless of a CFO’s political leanings, they seek certainty to make better-informed business decisions,” he says.
Companies eager to know what corporate tax reform might entail would be wise to study the Republican “blueprint” published in June. Dave Kautter, a partner in charge of the Washington national tax group at audit firm RSM says it contains a handful of key provisions that are likely to be important to any tax reform proposal:
“The law is really complex, and it relates to data not previously required. If you haven’t started, think about what you’re going to do to tackle the employer mandate information in terms of what you’re reporting. The deadline is coming up.”
Judy Mester, Managing Diretor, Deloitte Tax
Rates. House Republicans proposed a 20-percent corporate rate, while Trump has called for a 15-percent cap. They’ll have to settle on a number, but both are looking for a big reduction from today’s 35 percent.
Depreciation and expensing. House Republicans have proposed an immediate write-off for all tangible and non-tangible acquisitions, sparing the slower writedowns associated with depreciation schedules. In exchange for that, companies would lose their ability to deduct interest expenses. “Trump ties those two together,” says Kautter. “You either keep current law and keep your interest expense deductions, or you get full and immediate expensing and lose the interest deduction.”
International. Here’s where Trump and House Republicans are further apart, says Kautter, and it will be a huge issue to address in developing a reform package. Trump wants to tax foreign earnings at his proposed 15-percent rate and do away with the deferral of taxation until foreign earnings are repatriated, or brought into the United States. The Republican blueprint proposes allowing U.S. corporate earnings abroad to be taxed in those jurisdictions where it is earned and never taxed by the United States. “The second piece of the international issue is what do you do with the $2.6 trillion that is sitting abroad now?” says Kautter. Trump and House Republicans are not as far apart on that question, but they would have to agree on how those foreign earnings held abroad would be treated.
SOME VIEWS ON THE FUTURE OF TAX REFORM
Tax experts have some advice for companies to consider based on big expected changes coming in federal tax policy under a new administration and Congress:
“If you haven’t looked at the Republican blueprint that came out in June, you need to be doing that in short order. Since it was published, the House Ways and Means Committee has been developing legislative language, meeting with stakeholders. That’s going to be the main document on which the tax reform effort will be based.” —Marc Gerson, Miller & Chevalier
“One thing business leaders need to keep in mind is that any (tax reform) bill is likely to be revenue-neutral, which raises the possibility that for some businesses taxes could go down while other may see an increase.” —Jeff LeSage, KPMG
“If you believe rates will go down one way or the other, to the extent you think you can accelerate deductions and defer income, conventional thinking would tell you that’s a pretty sound strategy.” —Dave Kautter, RSM
“If I were a betting person, I’d say the three big areas of change will be rates, inheritance tax, and offshore earnings.” —Jason Kleinman, Herrick, Feinstein
“Some people might be excited about the possibility of major tax changes, but there could also be some real reasons to be cautious.” — Dustin Stamper, Grant Thornton
“We should all focus on the House Blueprint as well as Mr. Trump’s remarks about taxes. Together they are likely to represent the boundaries around the first tax reform draft we might see. But we need to keep the budgetary impacts in mind, as they should have an impact on the final product.” — Cathy Koch, EY
“Thirty-six tax extenders remain and are set to expire at the end of this year. The Obama administration and many Democratic lawmakers have been vocal about their desire to act on these tax extenders before year’s end. It is also possible that House tax writers could seek to move a miscellaneous tax bill before year’s end.” — Matt Cutts, Squire Patton Boggs
“It’s possible but unlikely Congress would repeal the (Affordable Care Act) individual mandate back as far as 2016. The thought is you deal with it in 2017 and forward. You have to keep going forward.” — Dave Kautter, RSM
Everything else. Katter says both Trump and House Republicans would retain credits for research and development expenses and would eliminate the corporate alternative minimum tax. It’s not clear how a tax reform package might address several other corporate tax issues, like the “last-in-first-out” method of accounting for inventory, which gives companies better expense deductions where it is practiced.
In addition to tax reform, companies can look out for the president-elect’s promised repeal of the Affordable Care Act, although the path forward is anything but clear. Companies are facing reporting deadlines with respect to the provisions of the ACA, and those don’t change even if companies hold hope that Trump will deliver on his promise to roll back and replace Obamacare.
By Jan. 31, 2017, companies will need to furnish individuals with a new tax form reflecting a variety of information about their employment status and insurance coverage. The IRS gave companies some leeway when they weren’t fully prepared to report in early 2016, but that’s not likely to repeat, says Judy Mester, a managing director at Deloitte Tax. Companies will also have some reporting to do directly to the IRS in early 2017.
“The law is really complex, and it relates to data not previously required,” says Mester. “If you haven’t started, think about what you’re going to do to tackle the employer mandate information in terms of what you’re reporting. The deadline is coming up.”
The surprising election outcome shouldn’t slow the pace of progress toward reporting, in the view of tax experts now anticipating big changes in tax policy. “I’m generally of the conservative view that you need to comply with the law of the land until you’re told differently,” says Gerson.
The same wisdom seems to prevail among tax experts with respect to the heavy new reporting requirements companies must now adopt after the U.S. Treasury Department rushed through new regulations around Section 385 of the tax code to address corporate inversions.
“I fully expect the new administration will take a very close look at the 385 regs to see if they make sense,” says Kautter. “But the prudent thing to do is to move deliberately to comply with the regulations until we get a better sense of what Congress is likely to do. It’s hard to say ignore it all.”