What does the Tax Cuts and Jobs Act mean for corporate entities?

Transcription

1 What does the Tax Cuts and Jobs Act mean for corporate entities? Jan. 24, 2018

2 Today s presenters Nick Gruidl Partner Nick is a member of Washington National Tax. His focus is advising on corporate mergers and acquisitions, bankruptcy and debt restructuring, private equity transactions, net operating loss issues and partnership taxation. Brian Kirkell Principal Brian is Washington National Tax s State & Local Tax (SALT) leader. He focuses on sales and use tax, credits and incentives, income and franchise, and property tax issues. Jamison Sites Manager Jamison is a member of Washington National Tax. His focus is on international, federal, and state and local tax and he has experience with international supply chain restructuring, repatriation and cost sharing agreement implementation.

3 Agenda Introduction to tax reform Domestic changes impacting all businesses Corporate tax changes International tax changes State tax considerations 3

4 Introduction to tax reform

5 Introduction to tax reform Lower corporate rates traded for fewer deductions Simplification not necessarily achieved Interest limitations result in a tax hike for some Move to territorial type system is a significant change Overseas earnings likely were not coming back at 35 percent Creation of minimum taxes on certain overseas earnings What will states do? Which provisions will they adopt? 5

6 Domestic changes impacting all businesses

7 Domestic changes impacting portfolio companies Expensing and depreciation of capital expenditures Limitations on business interest deductions Repeal of domestic production activity deduction (DPAD) Miscellaneous provisions 7

8 Capital expenditures Tax change Post reform law Considerations Bonus depreciation 100 percent bonus depreciation through 2022, then phased out through 2026 Applies to new and used property acquired and retroactive to assets placed in service after Sept. 27, 2017 Does not apply to goodwill and intangibles Adds more importance to purchase price allocation agreements Asset deals are even more attractive States may not conform to this provision as more than half of the states currently do not conform to bonus depreciation Section 179 $1 million permanent expensing, subject to limitations and phaseouts Limitation applied at the individual level so consider benefit for flow through Real property depreciation Requires a real property trade or business electing out of the interest expense deduction limitation to use the alternative depreciation system (ADS) Real property depreciation rules are complex and may need to consider business interest limitations 8

9 Interest deductions Tax change New interest deduction limitation Limits net interest expense deduction to 30 percent of adjusted taxable income (ATI) For 2018 through 2021, ATI approximates earnings before interest, taxes, depreciation and amortization (EBITDA) After 2021, ATI approximates earnings before interest and taxes (EBIT) Disallowed interest generally may be carried forward indefinitely Post reform law Net interest expense, so back to back loans remain viable for intercompany financing activities Exclusion for auto floor financing Limitation does not apply to businesses with an average gross receipts of $25 million and certain agricultural, farming and real estate businesses 9

10 Interest deductions (cont.) Tax change Considerations New interest deduction limitation Leveraged acquisitions get hit hard under this provision The deduction calculation for state tax purposes may differ for combined filers in certain states Could have significant effect on cost of capital Possibilities may exist to replace debt with rental, royalty, swap, partnership guaranteed payment arrangements or equity such as preferred stock Analyze opportunities to move debt around the worldwide group to best utilize interest deductions Expect significant regulatory guidance 10

11 Interest deductions: Example Example of Net Interest Deduction Limitation Taxable Income Addback: Interest Expense Addback: Depreciation & Amortization Adjustable Taxable Income (EBITDA or EBIT for 2022) Multiply by 30% of Adjustable Taxable Income Net Interest Deduction Taxable Income (before Interest Expense) Net Interest Deduction (2.10) (2.25) (2.40) (2.70) (2.10) (2.10) Estimated Taxable Income/(Loss) before NOL Deferred Net Interest Deduction Carryforward

12 Repeal of the domestic production activity deduction Tax change Repeal of domestic production activity deduction Considerations Generally the domestic production activity deduction provided for a deduction equal to 9 percent of qualified production activity income 12

13 Miscellaneous provisions Tax change Amortization of research and experimentation expenditures Considerations New law generally requires capitalization and amortization of domestic research and experimentation expenditures after 2021 Research and experimentation expenditures are currently deductible Employer operated eating facilities 50 percent limited and disallowed after 2025 Employer provided transportation Transit passes, parking and transportation Does not change the employee treatment Credit for paid family leave In general 12.5 percent of amounts paid during 12-week period assuming a 50 percent compensation level Subject to numerous rules and definitions 13

14 Corporate tax changes

15 Corporate tax rate changes Tax change Post reform law Considerations Reduced corporate tax rate and move to territorial type system Corporate dividend received deduction Reduced 21 percent flat corporate federal income tax rate, generally effective Jan. 1, 2018 Territorial type system allows more tax efficient repatriation 100 percent for 80 percent to 100 percent ownership 65 percent for 20 percent to 80 percent ownership 50 percent for less than 20 percent ownership Retains two levels of tax Blended rate for fiscal year taxpayers Changes in the dividend received deduction maintain the effective tax rates prior to tax reform 15

16 Net operating losses Tax change Post reform law Considerations Net operating loss (NOL) rules Limits NOL deduction to 80 percent of taxable income for NOLs arising in years beginning after Dec. 31, 2017 Eliminates NOL carrybacks for NOLs arising in years ending after Dec. 31, 2017 NOLs generally carried forward indefinitely if they arise in years ending after Dec. 31, 2017 Pre-2018 NOLs remain eligible for 100 percent income offset Immediate expensing benefit is reduced to the extent it generates an NOL Fiscal year taxpayers with years ending after Dec. 31, 2017 cannot carryback losses NOLs created by merger and acquisition (M&A) transaction costs cannot be carried back Limited impact on state NOLs as many states have their own NOL deduction provisions 16

17 Alternative minimum tax Tax change Post reform law Considerations Corporate alternative minimum tax (AMT) and AMT credit Repeals corporate AMT for tax years beginning after Dec. 31, 2017 For tax years beginning after 2017 and before 2022, the prior year minimum tax credit is refundable in an amount equal to 50 percent 100 percent for tax years beginning in 2021 Refundable credit is an unexpected benefit Might remain subject to limitations under section

18 Foreign derived intangible income deduction Tax change Post reform law Considerations Foreign derived intangible income (FDII) (effective for tax years beginning after Dec. 31, 2017) Deduction results in an effective percent Applicable for domestic C corporations with gross income generated by revenues to foreign customers for foreign use Products and services revenue with respect to property not located within the United States Requires base calculations of tangible income and intangible income Consider using C corporations to take advantage of FDII deductions Need to identify and document qualification of this deduction Sales to domestic unrelated parties before final overseas sale eliminates benefit New diligence item 18

19 Changes to section 162(m): Excessive employee compensation Tax change Compensation in excess of $1 million to executives (including CFO) of publicly held corporations is not deductible Considerations Expands employees considered covered employees At least CEO, CFO and 3 other highest Expands publicly held definition to include a company required to file reports under section 15(d) of the Exchange Act Includes debt and equity Does not require that securities are listed Generally eliminates performance based compensation exception from disallowance of deduction Includes items like options and bonus plans Pre-November 2017 plans may be eligible for grandfathering 19

20 International tax changes

21 Why do we need international tax reform? International and business tax reform rules are new to United States but not to the rest of the world Consistent with global trends and the United States is catching up Lower corporate rates in Europe and many other countries Territorial system elsewhere Argument is competitive tax system will increase employment German experiment Tax is one leg of the stool: health care and education 21

22 Territorial system for foreign earnings New dividends received deduction (DRD) category with complex rules U.S. corporations may deduct dividends paid by specified 10 percent owned foreign corporations No foreign tax credit (FTC) or deduction for foreign taxes on amounts deducted No deduction for dividends that are hybrid payments Effective 2018 Territorial system is a major break from worldwide system but all major aspects of U.S. international tax rules remain in place (subpart F, transfer pricing, FTC, etc.) 22

23 What about offshore earnings? New tax holiday for offshore earnings: Deferred offshore earnings taxed in 2017 for calendar year deferred income corps ; clears the earnings & profits (E&P) decks Two tier rates (15.5 percent/8 percent): cash vs non-cash assets Applies to a U.S. shareholder (individuals will get slightly higher rates) Must take into account share of aggregate earnings in all foreign countries But can offset positive earnings in some foreign countries with deficits of others Election to defer payment of tax over eight years Special election for S Corp shareholders can defer until triggering event (e.g., sale or liquidation) 23

24 Base erosion/anti abuse tax (BEAT) 10 percent minimum tax on U.S. corporations (5 percent for 2018) Applies where 10 percent of modified taxable income (MTI) exceeds regular tax MTI is taxable income without regard to base erosion tax benefit (i.e., no deduction for base erosion payments) Base erosion payments include any deductible amount paid/accrued to a foreign related party Includes payments for depreciable property or insurance payment Excludes items that reduce gross receipts (like cost of goods sold) BEAT applies to U.S. corporations, 500mm of gross receipts if base erosion percentage is 3 percent or higher Clients with global supply chains will likely be affected 24

25 GILTI and foreign intangible income Section 250 imposes a tax on: Foreign derived intangible income (FDII) ( percent) and Global intangible low taxed income (GILTI) (10.5 percent) Broadly speaking GILTI and FDII equal gross income minus an appropriate (10 percent) return on the tangible assets of the corporation Special rates do not apply to individuals 25

26 Significant technical changes Proposal to make controlled foreign corporation (CFC) look through permanent dropped 30 day rule for CFC status eliminated U.S. shareholder status given to owner of 10 percent of value Proposals to eliminate section 956 for corporate shareholders dropped Gain on transfer of foreign branches with prior losses Acceleration of world wide allocation of interest rules dropped Repeal of Grecian Case 26

27 High level planning considerations Planning area Opportunity Timing Accelerate/defer income or expense Entity planning Consider classification of foreign entities under territorial system (be mindful of section 367 consequences on reclassification) Worthless stock deductions in pre-effective period Supply chain planning Taxpayers may need to revisit supply chain structures to mitigate BEAT Taxpayers should review foreign subsidiaries for potential high returns and consider consequences or possible changes to structure or transfer pricing to deal with GILTI or FDII Treasury management Taxpayers should review treasury management structure for possible changes resulting from shift to U.S. territorial system Consider necessity of current intercompany debt structures Repatriation tax Taxpayers will need to ensure earnings and profits and tax pool computations are accurate and consistent with new section 965 rules to compute correct repatriation tax 27

28 CFCs with high and low earnings and deferred income Structure attributes C Corp has NOL CF = 100 Historical Section 956 inclusions and dividends (including during 2017 before Nov. 2, 2017) US Corp 100 NOL CF Considerations 28 Canada Corp 200 earnings Mexico Corp 100 earnings Canada Corp -100 earnings 1. What is the deferred income amount? (200) 2. Does deferred income amount offset 100 NOL? (can elect NO OFFSET against NOL) 3. Will dividends paid affect calculation of deferred income amount? 4. If you can t do a dividend, could you trigger section 956 in 2017 to utilize high tax pools? 5. Will FTCs come back with the deemed repatriation? (yes w scaleback) 6. Will U.S. corporations still be able to utilize FTC c/o and ODL going forward? How will foreign source income be generated to help utilize the carryforward?

29 Industry concerns Financial services Reversal of Grecian case will result in foreign partners being subject to tax and withholding agents (e.g., U.S. partnerships) will have to withhold or face penalties Manufacturing/consumer products companies BEAT minimum tax GILTI and FDII rules Real estate Drop in corporate rate also reduces tax incurred on sale of U.S. real property interest Limitation on interest deduction may encourage change in leverage 29

30 State tax

31 State corporate tax conformity to the IRC (Jan.19, 2018) WA MT ND ME CA OR NV ID AZ UT WY NM CO SD NE KS OK MN IA MO AR WI IL TN MI* IN KY OH NY PA MD WV VA NC SC VT NH NJ CT DE DC MA RI Rolling conformity Static conformity No general conformity No corporate tax linked to the IRC MS AL GA TX LA AK FL HI

32 Federal tax reform and state tax considerations Federal change State-level considerations Corporate rate reduction Federal impact of state tax items Increase of relative importance of state taxes to overall rate Likelihood of state rate increases/reductions Increase in IRC section 179 expense deduction Conformity State-level computation and tracking Consolidated federal vs. separate or combined state 100 percent bonus depreciation Conformity State-level computation and tracking Impact on state investment credits and incentives based on federal basis Interest expense limitation Conformity and definitional differences Impact of state-level related party interest addbacks Impact on valuation allowance analysis 32

33 Federal tax reform and state tax considerations (cont.) Federal change State-level considerations NOL modifications Conformity Impact on valuation allowance analysis Impact on ability to utilize state credits Increase in UNICAP threshold Conformity Tracking of state-level inventory without federal data Increase in mandatory accrual threshold Conformity State-level computation and tracking on an accrual basis when federal accounting is on the cash basis Repeal of domestic production activities deduction Conformity Impact on separate state calculations Repeal of corporate AMT Conformity Impact on separate state AMT calculations 33

34 Federal tax reform and state tax considerations (cont.) Federal change State-level considerations 8-year transition tax on deemed/actual repatriations Conformity Impact of state treatment of Subpart F income in tax base calculation Inclusion/exclusion of Subpart F dividend income in apportionment factor and sourcing Federal/state group differences Impact on valuation allowance and deferred taxes BEAT Conformity Impact of state-specific anti-abuse provisions GILTI Conformity Impact of state treatment of Subpart F income in tax base calculation Federal/state group differences 34

35 Takeaways Understand and calculate the impact of state tax reform on going-forward state tax liabilities Be prepared for potential increase in ready cash and capital spending Consider state and local level credit and incentive programs and exemptions when reinvesting Assess the impact of state-level decoupling to 179 expense and bonus depreciation deductions Re-evaluate efficiency of existing entity and debt structures for issues and opportunities Analyze impact of state conformity/nonconformity on federal elections and state-only options Analyze impact on apportionment factor and state-level combined/consolidated calculations Be aware that the states are going to maintain the status quo Monitor state legislative activity Monitor publication of administrative guidance regarding tax reform Be ready to react quickly to state-level change 35

36 Tax reform resource center Visit our tax reform resource center for more information on how legislation can affect your business and tax planning.

37 Today s presenters Nick Gruidl Partner nick.gruidl@rsmus.com Brian Kirkell Principal brian.kirkell@rsmus.com Jamison Sites Manager jamison.sites@rsmus.com

38 Upcoming tax reform webcasts Taxes in 2018: Considerations for an omnichannel sales strategy January 25, 2018 U.S. Tax Reform: How It Will Affect Private Equity Firms and Portfolio Companies January 30, 2018 Tax reform: Key considerations for individuals and business owners February 02, 2018 What does the Tax Cuts and Jobs Act mean for pass-through entities? February 14, 2018

39 Thank you for your time!

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