H.R.1, the recently enacted bill originally known as the Tax Cuts and Jobs Act of 2017 (TCJA), provides the largest set of changes to the Federal tax code in several decades. Individuals and companies alike are grappling with the implications of the Act, as the impacts leave few individuals, businesses, and non-profits unaffected.
Most CEOs have an array of internal (and sometimes external) tax professionals to help them navigate the direct impacts of tax reform, but CEOs also need to weigh the strategic implications that the changes may have on the enterprise.
One of these is the corporate footprint: the deployment of business functions in specific geographies. The footprint includes where the enterprise is headquartered, where it engineers and designs its products, where and how it manufacturers, delivers services, holds inventory in warehouses, supports customers, and even where it chooses to sell its products and services.
It turns out that the 2017 tax act contains a number of significant implications and opportunities for CEOs who possess Location Awareness – the recognition that careful planning of the footprint is a key driver of shareholder value. Nearly every company should thoughtfully weigh the new law’s impact on their current and planned footprint of locations.
“For any business with capital projects, talent in high-tax jurisdictions, or plans to alter the footprint, tax impacts could likely play a more significant role.”
• Corporate Income Tax Rate Decrease: The law reduces the Federal corporate income tax rate from 35% to 21% – starting in 2018. While average effective rates are often even lower for many companies, the overall rate reduction may help encourage more companies to invest in the US.
• Expensing: For the next 5 years, the law enables companies to deduct the entire value of their investments from income before paying tax, instead of spreading the deduction over several years. This may favor companies who either have been delaying or are planning significant capital investments in buildings and equipment.
The immediate expensing provision provided under the law also has the potential to affect the eligibility of investments for state investment tax credits. State credit provisions in certain states reference “Section 38 property” or “capitalized” tangible personal property. Close monitoring of state rules is advisable in order to determine if property now expensed for federal tax purposes continues to qualify for a state investment tax credit.
• Deemed Repatriation Dividend/Actual Repatriation: The law requires certain U.S. shareholders of foreign entities to recognize income related to the foreign entities earnings and profits, along with providing a deduction for a portion of this deemed repatriation dividend. It is anticipated by the proponents of the 2017 tax act that a substantial portion of the foreign E&P subject to the deemed repatriation will be repatriated to and reinvested in the American economy. To the extent companies are planning to increase capital spending as a result of repatriation (or full capital asset expensing), careful consideration should be given to available state incentive programs that may augment any federal benefits.
• Limits on State Personal Tax Deductions: The amount of state and local income and property tax that can be deducted from individual Federal returns is now capped at $10,000. This could be a factor of consideration for both individual and corporate relocation from states with higher income and property taxes to jurisdictions with lower income and property tax rates.
• Incentives – no longer tax-free: State and local economic development incentives will no longer be treated as contributions to capital, and appear to now be taxable. This may shift incentives away from direct incentives such as cash or grants of free land toward in-kind assistance such as infrastructure improvements, employee recruiting and training support and other indirect inducements. At a minimum, project teams should scrutinize each incentive offered carefully to understand the tax implications arising from the new law.
For any business with capital projects, talent in high-tax jurisdictions, or plans to alter the footprint, tax impacts could likely play a more significant role than in recent memory. The 2017 tax law provides both opportunities and challenges for CEOs exploring ways to grow the business, increase after-tax margins, and find and retain top talent.