With strong prospects for tax reform, corporations of all sizes are looking anxiously and hopefully at the tax proposals of both the incoming administration and the House GOP, according to Scott Harty, a partner in Alston & Bird’s Federal & International Tax Group.
“While the Trump and GOP tax plans are not identical, they are closely related and both contain a number of provisions that are highly relevant to business,” said Harty. “If even a portion of the proposals are enacted, this could be the most significant shift in business taxation in over 30 Years,” he said.
“With any change of this scale, there will be winners and losers. A key provision that many businesses will want to follow is the elimination of the deductibility of business expense – this could be very costly to some companies. Moreover, the concept of ‘border adjustability’ is novel to taxpayers and practitioners, so its implementation could be difficult and may have unintended consequences for companies.”
During the campaign, Trump proposed to allow companies engaged in manufacturing in the U.S. to elect to immediately expense capital investments, rather than depreciating them. Companies that choose to expense capital investments would forego the deductibility of interest. Under the House GOP tax reform blueprint, capital investments would be immediately deductible without the requirement of an election, although the blueprint would disallow deductions for net interest expense.
“Interest expense is tricky because there’s no definitive proposal, but it’s likely that certain debt would be grandfathered,” he said. “This would be helpful for highly leveraged companies with large amounts of debt. And then I suspect there’s going to be carve-outs for certain financial institutions.”
“If all debt is grandfathered at the date of passage of the proposal, it will alleviate a lot of concern,” Harty said. “But going forward, companies will have to revisit how their capital structure looks, and how much debt they take on, since there would not be a bias in favor of interest. This will affect banks since businesses will take out less debt if they can’t deduct the interest. But they still need to fund their operations – they can’t do it all with equity.”
The House GOP proposal utilizes the concept of border adjustments, which would eliminate the U.S. tax on products, services and intangibles produced in the U.S., Harty indicated.
But the vast majority of practitioners don’t know what border adjustability is, and haven’t begun to think through what it means for their clients, he observed. “It’s very complicated -- It’s present in the European VAT systems, but we just don’t have that concept in the U.S. A lot of practitioners will be wrestling with it.”
In at least one interview, Trump agreed, calling the border adjustment proposal in the blueprint “too complicated,” but he added that he is open to discussion on its merits. The proposal would eliminate tax incentives to move headquarters overseas, according to Ways and Means Committee Chairman Kevin Brady.
