[IMGCAP(1)]The tax reform proposal put forward by House Ways and Means Chairman Dave Camp earlier this year attempts, like other proposals before it, to broaden the base and lower the rates.
One of the ways it accomplishes this is by doing away with targeted tax benefits, which has the effect of forcing businesses to choose which provisions are the most important to them, and therefore necessary to defend.
In the Grant Thornton Spring 2014 CFO Survey, over 1,000 CFOs and controllers were asked which of the following tax benefits were most important to their business: bonus and accelerated depreciation, the research credit, the domestic production activities deduction, or deferral of unrepatriated offshore earnings.
By far the most important tax benefit selected was bonus and accelerated depreciation, with over half (55 percent) selecting it.
“Over half said that was the most important to their business, and it follows that it’s the hardest to give up,” said Mel Schwarz, a partner in Grant Thornton’s Washington National Tax Office.
Although not much movement has occurred on tax reform in Congress this year, it’s still a topic that generates seemingly endless discussion.
“We’re going to continue to talk about tax reform until it actually happens,” said Schwarz. “It could take a while, but the reasons we started down the road have a lot to do with the corporate rate structure here compared to other countries.”
“Our corporate rate is higher than in any other country, and we have a worldwide system, whereas most of our trading partners have something much closer to a territorial system, where you in essence pay tax where you earn income and a minimal tax is charged when you bring the money back home,” said Schwarz. “Although we provide an FTC [Foreign Tax Credit], that typically leaves
a significant amount of tax to be paid when a U.S. multinational repatriates the earnings.”
And that explains why corporate inversions—where a U.S. corporation moves its headquarters to a low-tax jurisdiction while maintaining its operations in the U.S. —are appearing more frequently in the news, according to Schwarz.
“That in fact is the reason we see this inversion issue bubbling up now,” he said. “U.S. multinationals are saying they can’t continue to operate at a disadvantage with companies they compete against. Either they need tax reform or they need to not be a U.S. multinational.”
“That’s the message that someone who seeks to leave is really sending,” he said. “Ultimately we’re going to have to address that, and to address it involves reducing the corporate tax rate and changing to something that looks more like a territorial tax system. Those will reduce federal receipts, so we either have to put everything on the federal credit card or reduce other tax benefits.”
Accelerated and bonus depreciation, and the research credit, both expired and are awaiting reinstatement with a host of other “extenders.” Although Schwarz feels the research credit is more likely to be re-enacted than accelerated and bonus depreciation, “for 2014 and 2015 the discussion is that Congress will eventually restore both.”
Although passage might be difficult during an election year, the likelihood is that Congress will act before the end of 2014, according to Dustin Stamper, director in Grant Thornton’s Washington National Tax Office.
“Passing them in 2015 retroactively is one scenario, but there’s a pretty good chance of doing it before the end of the year,” he said.
The survey also found that bonus and accelerated depreciation were even more important for private companies: 60 percent of private company executives named it as the top tax benefit, compared to 40 percent of public company executives.
“Depreciation affects cash flow for private companies, but it does not affect the reported earnings on financial statements,” explained Schwarz. “Privately held companies are very sensitive to cash flow and current earnings, while publicly held companies are more sensitive to the earnings they report to shareholders.”
“The survey points out that tax reform is really hard,” concluded Schwarz. “There is a tension between attempting to lower the rate and trying to provide the changes that for competitive reasons need to be considered.”