Industry Outlook: Tax Reform s Impact on Manufacturing

Transcription

1 Industry Outlook: Tax Reform s Impact on Manufacturing Please disable pop-up blocking software before viewing this webcast Wednesday Jun 13, :00 PM ET 1 CPE credit

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4 The future of tax Significant provisions that impact manufacturing

5 Speakers Meg Szabo, Director, Issue and Policy Programming, Bloomberg Next (moderator) Joseph Hagedorn, Tax Law Editor, Business Entities and Tax Accounting, Bloomberg Tax Dixie Pond, Federal Tax Law Editor, U.S. Income Group, Bloomberg Tax Ed Maginot, Tax Reporting & Advisory Partner, Grant Thornton LLP Brian Murphy, National Tax Industry Leader, Grant Thornton LLP Andrew Wilson, International Tax Partner, Grant Thornton LLP Jeff French, National Managing Partner, Consumer and Industrial Products, Grant Thornton LLP

6 Learning objectives Outline the key provisions of the Tax Cuts and Jobs Act that impact the manufacturing industry Explain the impact on international, federal and state and local tax planning Identify strategies and solutions in key areas of tax reform including rate changes, bonus depreciating, and deductible income

7 Tax reform overview for manufacturers Beyond the reduction in corporate rate and the deduction for pass-through entities, the tax reform act is very complex Manufacturers need to rethink many facets of their business strategy These changes require detailed analysis and appropriate tax planning before the business strategy can be addressed In addition to immediate time-sensitive opportunities that should be completed before the 2017 returns are filed, there are tax decisions that'll need to be made in 2018 and that will have long- term ramifications Today we will reiterate some of the key provisions of the Act, and discuss certain business aspects that these provisions may have for manufacturing companies We'll cover various provisions related to international, federal and state and local tax

8 Tax reform today Legislation following the 2017 tax act Bipartisan Budget Act of 2018 (February 9, 2018) Consolidation Appropriations Act of 2018 (March 23, 2018) Additional technical corrections? Recovery period for qualified improvement property? Proposed regulations for full expensing (expected June-July)? Permanency? Certain tax cuts are set to expire in 2026, but there is a push to make the tax cuts permanent What can we expect? Third Quarter Priority Guidance Plan

9 International considerations

10 International provisions GILTI and FDII ( 951A and 250) A U.S. shareholder of any CFC must include in gross income for a taxable year its GILTI for the taxable year GILTI = net CFC tested income - net deemed tangible income Determined annually with respect to each U.S. shareholder Similar to subpart F inclusions Effective for CFCs with tax years beginning after December 31, 2017 FDII = (foreign-derived deduction eligible income / all deduction eligible income) * deemed intangible income Effort to deter taxpayers from holding intellectual property outside of the United States

11 International provisions BEAT ( 59A) Applies to corporate taxpayers (excluding S corporations, RICs and REITS) Must have average annual receipts of $500 million for 3-year period ending with preceding taxable year and base erosion percentage of 3% (2% for banks and securities dealers) Base percentage calculation excludes NOL deduction, dividends received deduction under 245A, and GILTI/FDII deduction under 250, among other items BEAT equal to 5% for tax years beginning in calendar year 2018 Raised to 10% for years Raised again to 12.5% beginning in 2026

12 C-Corp vs. Pass-through C-Corp vs. Pass-through Incongruity Issue C-Corp Pass-through/Individual Dividend received deduction (10% or more owned foreign corps) 100% dividends received deduction for most dividends N/A Subject to statutory rates* Foreign branch income Subject to 21% corporate rate Subject to statutory rates (generally 37%)* 50% deduction allowed to offset new global intangible low taxed income Available to C-Corp N/A 37.5% deduction allowed to offset "foreign-derived intangible income" Available to C-Corp N/A * Pass-through deduction is only available for income that is effectively connected with a U.S. trade or business. The deduction is not available for dividend income from CFCs

13 GILTI S corporation planning New tax law clearly created negative tax consequences for multinational S corporations particularly GILTI where both GILTI deduction and foreign tax credits are not allowed to S corporations Consider utilizing a U.S. blocker corporation to hold international entities Would generally allow all GILTI income to accumulate into C corporation and allow both FTC and GILTI deduction of 50% at C corporation level to minimize the impact of the corporate tax on GILTI income. CFC included as tested income under 951A will produce PTI (previously taxed income). Generally distributions from CFC to Parent are made out of PTI first and allow monies to be repatriated tax free (subject to any withholding requirements)

14 GILTI U.S. Shareholder vs. Consolidated Group USP Consolidated Group USP USP F1 F2 F3 F4 Tested Income: $100 Tested Income: $100 Tested Loss: ($100) Tested Loss: ($100) Absent regulations to the contrary, GILTI appears not be computed on a consolidated group basis. Review should be performed to ensure the appropriate mix of Tested Income entities and Tested Loss entities. The above structure would result in a $200 GILTI inclusion despite nil cumulated tested income in the combined consolidated group. Net deemed tangible income return can also be stranded. Consider existing structure and impact to see if any restructuring could have a favorable impact

15 Base Erosion Anti-Abuse tax Less: Equals: Less: Equals: Times: Equals: Less: Equals: Total Sales Cost of Goods Sold* Gross Income Sum of Business Deductions Salaries Related Party Interest (not subject to withholding) Related Party Services (services cost method) Related Party Services (other transfer pricing method) Related Party Royalties (subject to 30% withholding) Qualified Derivative Payment Other Related Party Payments (subject to 15% withholding) Other deductible payments Taxable Income Tax Rate Regular Tax Liability R&D Credits and 80% of certain Sec. 38 credits Regular Tax Liability (after credits) * Assumes company is not an inverted company. Total Sales Cost of Goods Sold Gross Income Sum of Business Deductions Salaries Related Party Services (services cost method) Related Party Royalties (subject to 30% withholding) Qualified Derivative Payment 50% of Other Related Party Payments (15% withholding) Other deductible payments Taxable Income Minimum Tax Rate Minimum Tax Liability Regular Tax Liability Minimum Tax Liability Base erosion minimum tax

16 BEAT Corporate planning As shown in previous slide certain deductions allowed for both regular tax and minimum tax calculations Consider reviewing internal costs as potential benefit from classification of costs from other deductions to cost of goods sold May be an automatic change of accounting method Review potential benefit to filing check the box elections on foreign subsidiaries to eliminate certain related party transactions Refinance and review related party payments like interest to reduce impact to minimum tax Awaiting further guidance from IRS

17 Federal considerations

18 Rate changes Corporate tax rate Lowered to a flat 21% on all income, including capital gains Alternative minimum tax rate Repealed alternative minimum tax for corporations Existing corporate AMT credits are monetized over the next 4 years

19 199A deduction Deduction for sole proprietors and pass-through entity owners Deduction for combined qualified business income amount (subject to taxable income limitation): 20% deduction against qualified income creates a top effective rate of 29.6% Most manufacturing activity wouldn t typically be an excluded service, but the deduction could be limited by the wage and investment test.

20 Rate changes/199a Business Considerations New tax rates Does it make sense to convert to a C corporation? Consider acceleration of expenses and deferral of income Automatic method changes Payment liabilities (example: pension) Fiscal year end taxpayers

21 Recovery periods for depreciation purposes The Act intended to consolidate building improvement categories into one new type of Qualified Improvement Property (QIP) Previously, Qualified Leasehold Improvement, Restaurant and Retail Property had 15-year life and therefore eligible for 50% bonus QIP allowed broader eligibility and was specifically made eligible for 50% bonus, but still had 39-year recovery period Intention in Act was to repeal separate provisions and give QIP a 15-year life, meaning it would qualify for 100% bonus (Leaseholds, Retail and Restaurant would not need separate provisions and would generally qualify under broader eligibility for QIP) But no Recovery Period assigned to QIP due to unintentional legislative drafting omission Recovery period is 39 years under MACRS GDS and 40 years under ADS Effective for property placed in service after December 31, 2017

22 Bonus depreciation 100% bonus depreciation for property acquired and placed in service after September 27, 2017, but before January 1, 2023 Subject to phase-down after December 31, 2022 (20% reduction each year) Different rule for long production period property Used property may be eligible Effective for property acquired and placed in service after September 27, 2017 Different percentages for property acquired before September 28, 2017 and placed in service after September 27, 2017 For the first tax year ending after September 27, 2017, election is available to apply 50% (instead of 100%) expensing

23 Bonus depreciation Business Considerations Applicable after September 27, 2017 except for property acquired pursuant to written, binding agreement Expansion of bonus depreciation for used property Election to use prior year minimum tax credits in lieu of bonus depreciation was repealed for tax years beginning after December 31, 2017 QIP was previously 39 year useful life but eligible for bonus Clear legislative intent for QIP to qualify for bonus Due to legislative oversight, the statute on its face is not favorable to support the claim of bonus May require a legislative fix Treatment is NOT CLEAR!

24 Business interest expense limitation Net business interest expense deductions of all taxpayers are generally limited to 30% of a taxpayer s adjusted taxable income, with the definition of ATI changing in 2022 Computation of ATI switches from use of EBITDA to EBIT Applies to companies with annual receipts of more than $25 million annually Recent guidance: Notice ( ) Effective for tax years beginning after December 31, 2017

25 Business interest expense limitation Business considerations Computing net business interest expense interest income? Consider EBITDA calculation De minimis election? Aggregate business/consolidated basis

26 State and local considerations

27 Tax reform and SALT base Base expanding without rate reductions Larger proportion of US tax liability Planning considerations

28 De-coupling the new normal Past experience with bonus Common areas Tracking and reporting complexities

29 State's response to Federal Tax Reform California Static conformity to I.R.C. Response to federal SALT deduction New York Rolling conformity to I.R.C. Response to federal SALT deduction Georgia Static conformity to I.R.C. Conform to some I.R.C. provisions and decoupled from others

30 International provisions Section 965 reporting GILTI, FDII & BEAT implications

31 New US investment Tax Reform objectives Investment planning Section 118 changes

32 Questions

33 Speakers Meg Szabo, Director, Issue and Policy Programming, Bloomberg Next (moderator) Joseph Hagedorn, Tax Law Editor, Business Entities and Tax Accounting, Bloomberg Tax Dixie Pond, Federal Tax Law Editor, U.S. Income Group, Bloomberg Tax Ed Maginot, Tax Reporting & Advisory Partner, Grant Thornton LLP Brian Murphy, National Tax Industry Leader, Grant Thornton LLP Andrew Wilson, International Tax Partner, Grant Thornton LLP Jeff French, National Managing Partner, Consumer and Industrial Products, Grant Thornton LLP

34 Disclaimer This Grant Thornton LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered For additional information on matters covered in this presentation, contact your Grant Thornton LLP adviser

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