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IMA Tax Policy Blog

Tackling tax reform: Answers to three burning questions

From IMA member Plante Moran on March 07, 2017 . . .

Should you wait until tax legislation is enacted to plan? In a word: no. There are several action items to consider now. The fact that one party now controls both chambers of Congress as well as the Oval Office significantly increases the likelihood that some version of Republican-led tax reform will be enacted soon.

We’ve talked with many executives who want to know more about the changes and how to plan for them. Specifically:

  • What will tax reform look like?
  • When will it be enacted?
  • What can I do now to plan for it?

Here are some answers to these burning questions.

What will tax reform look like?

No clear consensus exists for what tax reform will look like exactly, but here’s what we do know:

House Republicans have put forth “A Better Way” plan focused on lowering rates while reducing or eliminating certain credits and deductions. It also includes a border adjustment provision that causes exports to be taxed more favorably than imports.

President Trump has put forth various broad ideas, many of which are similar in concept to the House Republican’s plan but with even lower rates. He’s been lukewarm to the idea of a border adjustment. While his plan has been very short on specifics, he has indicated that he will release a more detailed plan shortly.

Senate Republicans have yet to formally sign on to any existing proposal and may create their own.

Congressional Democrats have limited influence, but they may put forth some demands that could affect the final product.

When will tax reform happen?

The Trump administration and House GOP leaders have stated an intention to enact a law by August of this year. However, this appears to be an aggressive timeline given the vast number of moving pieces within the various tax proposals and the complicated legislative landscape surrounding tax reform. Unless a broader group of Republicans, including President Trump, coalesce around a common plan quickly, enactment may drag into 2018.

Today’s to-dos

Even though legislative details and effective dates are unclear, planning for tax reform now is critical. Having a plan will allow you to react quickly to ensure that you can take full advantage of it whenever it becomes reality. Here are a few ideas:

Lobbying — If you want to influence policy, become active with industry trade associations now. It’s much easier to influence proposals before they become public than to argue why they should be changed or removed. Remember, as the saying goes — if you’re not at the table, you’re on the menu.

Entity choice — Evaluate the effect of reduced corporate and personal tax rates on whether your company should be a pass-through entity or a C corporation. At what point does a reduction in double taxation warrant reconsideration of your company’s tax status?

Cash flows —- Consider how tax reform may impact current and future cash flow planning and financing needs. This includes the cash flow impacts of a border adjustment system, how potential changes to taxes on foreign income may impact current cash repatriation plans, and how the timing of certain income and deductions may reduce overall tax burdens as rates are decreased.

Secondary effects — Create a cross-functional team to understand the basic goals of Republican-led tax reform and to brainstorm any secondary consequences that could arise if the proposals become law. For example, would a reduction in tax rates impact current or future business valuations that might be obtained in connection with acquiring other businesses or to determine the extent to which grants of stock rights are considered taxable? Would revised valuations impact the cash flow upon which lease rates are based?

Balance sheet — Consider how lower tax rates impact balance sheets, including how changes to deferred taxes may affect your total equity or financial ratios.

The one certainty about tax reform is that nothing is certain until it is enacted. For additional updates as the process continues, as well as support if you’re interested in planning for reform, please give Plante Moran a call.

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Source: IMA member Plante Moran