Preparing Your Business for Tax Reform
A great deal of uncertainty remains as to whether Congress will enact tax reform legislation in the coming months. Most experts seem to agree the likelihood of significant reform being proposed, and eventually enacted, appears to be as high as it has been in more than 30 years. So, what should businesses do to prepare themselves in the coming months to ensure they are ready if tax reform becomes a reality?
According to Michael Hadjiloucas, partner-in-charge of the Corporate Tax Group at EisnerAmper LLP, diligence is critical for businesses facing potential changes due to the various tax proposals being considered by Congress and the Trump Administration.
EisnerAmper believes that, as part of any reform effort, federal corporate income tax rates will be lowered, not only to stop the exodus of companies moving to other countries but to also facilitate overall business growth and spending. Whether or not tax reform encompasses the border tax proposal offered by House Republicans (see related article in this issue), it is prudent that businesses know the effects these changes will have and adopt all or some of the following strategies to put themselves in position to respond to reform at every stage.
1. Businesses should devise a system to monitor legislative developments
Every business must have a basic understanding of all proposals under consideration. CFOs and corporate tax departments should track the changes through the legislative process. “This doesn’t have to be a day-to-day thing,” notes Mr. Hadjiloucas. “But a corporation must be prepared to identify potential changes as they arise and quantify what they will mean for the company’s balance sheet, P&L, and overall valuation.”
In addition to regular monitoring of news developments, companies would be well-advised to familiarize themselves with the House GOP blueprint for tax reform, which encompasses the border tax adjustment as a component of a larger overarching proposal encompassing tax cuts and adjustments to deductions, among other items. As other proposals are fleshed out and released for public consumption, either in outline form or legislative language, companies should conduct a similar analysis.
2. Businesses should model various tax reform proposals to gauge potential effects
One of the most critical functions for a CFO and corporate tax department is to keep company executives informed on the potential impact of reform proposals. Accordingly, CFOs and corporate tax departments should devise models that gauge the effects of any particular reform on the company’s present and future tax positions in relation to a company’s overall deferred tax assets and liabilities. EisnerAmper recommends that modeling should mirror the corporate tax provision documents routinely prepared for a company’s balance sheet at year-end. If a company has a $1,000,000 tax loss in the prior year valued at $350,000 (35% tax rate), a reduction in the tax rate to 15% would lessen the value of that asset down to $150,000. Further, if a company has a large deferred tax asset, it may wish to accelerate that benefit to take advantage of the current high rate. On the other hand, if a company has already accelerated a tax deduction and now has a deferred tax liability, a reduction in the rate would lower the liability. Thus, it is critical to understand how these positions are affected on the date reform goes into effect.
In addition, it is imperative to understand how tax reform may impact any mergers, acquisitions, divestitures or restructurings under consideration. Specific proposals could be a deal killer or have a material impact on the value of the target. A well-crafted model should identify the economic impact each likely proposal would have on the deal. Without this information, deal participants may get blindsided with unintended consequences.
Models should be particularly sensitive to subtle differences in reform proposals as they are released. For example, under the House GOP blueprint, current provisions regarding research and development and LIFO accounting would likely be retained, while other reform proposals would eliminate these provisions. These differences should be vetted carefully for their impact, particularly in industries for which they represent a significant component of a company’s tax planning strategy.
3. Businesses should proactively communicate with lawmakers on tax reform proposals.
Once the C-suite is armed with the knowledge provided by monitoring and modeling, it is incumbent on companies to engage legislators in discussions concerning tax reform and how they expect it to impact their businesses. For larger companies, CEOs may enjoy fairly direct access to their congressmen, senators and even lobbyists, and now is the time to reach out to them. Other companies may make their voices heard through the efforts of trade or professional organizations.
The prospects for tax reform are very real, and no business--large or small--should be caught unprepared if it happens.
Business Tax Quarterly – Spring 2017