2018: TAX OPPORTUNITIES AND CHALLENGES FOR MANUFACTURERS

Transcription

1 RSM US LLP. All Rights Reserved.

2 2018: TAX OPPORTUNITIES AND CHALLENGES FOR MANUFACTURERS Tax planning in an evolving tax landscape Wednesday, January 10, 2018

3 Our manufacturing focus Steve Menaker Manufacturing National Leader Audit Partner Charlotte Manufacturing at RSM RSM US LLP serves over 4,000 industrial manufacturing companies We have companies across the country from heavy equipment manufacturers to chemical manufacturers To sign up for our monthly manufacturing industry newsletter or learn more about our industry focus, visit our website at

4 Today s presenters Tom Windram Partner Washington National Tax Washington, D.C. Ryan Corcoran Senior Manager Federal tax practice Madison, WI Charles Britt Senior Manager State and local tax practice Raleigh, N.C. Jerry Wilson Partner International tax practice Raleigh, N.C.

5 Agenda Topic 2018 manufacturing outlook Federal tax reform and opportunities State tax International tax

6 2018 OUTLOOK

7 Why tax planning is urgent today Manufacturing sector strength Jobs up, openings at high levels Exports up 4 percent Strong U.S. economy up almost 3 percent Regulations loosened Trade agreements are uncertain Infrastructure promise Tax reform

8 FEDERAL TAX 2018 planning tips for manufacturers

9 Middle market leaders optimistic Strong expectations on revenues, net earnings, hiring and compensation Reduce corporate tax rates Invest in capital Invest in training Encourage innovation by incentivizing research, leveraging technology and employing top talent

10 Tax Cuts and Jobs Act Key business provisions Reduces C corporation tax rate from 35 percent to 21 percent Repeals alternative minimum tax Pass through non-professional businesses receive a 20 percent deduction on pass through income Immediate capital expensing

11 Tax Cuts and Jobs Act, cont. Key business provisions Research and development credit retained Limitations on business interest expense Repeals domestic production activities deduction New net operating loss (NOL) limitations Timing of financial statements

12 Current law for 2017 returns Capital expenditures 50 percent bonus depreciation for capital expenditures Immediate section 179 expensing on qualified expenses Net operating losses Carryback 2 years, forward 20 years Domestic production activities deduction Available credits Research and Development (R&D) Credit Work Opportunity Tax Credit (WOTC)

13 Tax accounting methods Timing of recognizing income and expenses for tax purposes Comparison to book/gaap treatment Changing tax rates provide for a permanent savings tax rate arbitrage Deduct item for tax in 2017 at 35 percent rate Reverse item in 2018 at 21 percent rate 14 percent permanent cash tax savings

14 Benefits of method changes Streamlined filing procedures No need to amend open returns Favorable recognition periods IRS audit protection

15 Income deferral/expense acceleration strategies Overall cash or accrual Advanced payments, deposits and deferred revenue Prepaid expenses Self-insured medical Accrued rebates Software development costs Fixed assets and depreciation

16 Selected tax reform provisions Cost recovery Increased expensing Expansion of section 179 expensing Small business reforms Expansion of taxpayers eligible for cash method Exemption from requirement to keep inventories Expansion of the exception from UNICAP rules Income recognition New earlier of test for tax revenue recognition

17 STATE TAX Important changes with state taxing regimes

18 State tax implications of federal tax reform A question of conformity with the Internal Revenue Code Rolling Fixed Selective Some provisions broaden the federal income tax base (e.g., interest expense limitations) Potential windfall for states Some provisions allow deductions from the federal income tax base (e.g., bonus depreciation) Expect decoupling for state purposes

19 State tax implications of federal tax reform, cont. Pass through entity (PTE) deduction 20 percent PTE deduction is allowed in computing taxable income (as opposed to adjusted gross income) Important in determining whether states will conform to the PTE deduction May not provide a benefit in many states State and local tax deduction Most states already require state income taxes to be added back in computing state taxable income

20 Potential ripple effects Expansion of economic nexus Increased focus on state income tax rates Expansion of sales and use tax bases Imposition of new, broad-based taxes

21 Potential ripple effects, cont. Intercompany transaction implications Foreign entities and transactions Choice of entity implications M&A activity New investment (credits and incentives)

22 Qualifying events and triggers for incentives Create new business operations Construction/purchase/lease of new facilities Purchase of new machinery/equipment Infrastructure improvements Hiring and training of new employees Expand, realign or relocate existing facilities Construction/purchase/lease of new/expanded facilities Purchase of new machinery/equipment Infrastructure improvements Hiring/retention of new/existing employees Training of new/existing employees Maintain existing facilities Retaining existing workforce Hiring due to employee turnover Training of new and existing employees

23 INTERNATIONAL TAX Important considerations for the multinational manufacturer

24 Why did we need international tax reform? International and business tax proposals are new to U.S. but not to the rest of the world Consistent with global trends and U.S. is catching up Lower corporate rates in Europe and many other countries Territorial system elsewhere Argument is competitive tax system will increase employment

25 Territorial system for foreign earnings A 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.)

26 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 noncash 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)

27 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 Companies with global supply chains will likely be affected

28 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

29 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 Treasury management 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 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 Opportunity to return cash and redeploy

30 THANK YOU Please submit questions in the Q&A, and we will respond following the session

31 Contact your presenters Tom Windram Partner Washington National Tax Ryan Corcoran Senior Manager Federal tax practice Charles Britt Senior Manager State and local tax practice Jerry Wilson Partner International tax practice

32 Stay connected and informed Register Monitor Explore Follow rsmus.com/events rsmus.com/taxreform rsmus.com/manufacturing LinkedIn Twitter

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