The Tax Cuts and Jobs Act of 2017 (TCJA) took effect on Jan. 1, 2018, and we’ve already seen some of its effects on the corporate world. As part of the newly implemented law, corporations must adjust to a lower income tax rate. Corporations now pay a 21 percent rate, down from 35 percent federally.
This has resulted in an increase in available cash for many American corporations. What’s the best use for this influx of new cash?
Key elements of the new law
The TCJA represents the largest change to the American tax code in decades. From a business standpoint, the law alters everything from the corporate tax rate to expensing, credits, deductions, accounting methods and more.
Here’s a brief rundown of some of the major provisions:
- Reduced corporate tax rate and elimination of corporate alternative minimum tax (AMT): Organizations subject to the corporate AMT in previous years can utilize prior year minimum tax credit to offset liabilities.
- Interest expense deduction: Limits deduction to net interest expense that exceeds 30 percent of adjusted taxable income (ATI).
- Allows immediate expensing of “qualified property” placed after Sept, 27, 2017 and before 2023.: Increased expensing is set to phase-down starting in 2023 by 20 percentage points for each of the five following years.
- Limits net operating losses (NOLs) to 80 percent of taxable income for losses arising in tax years beginning after 2017.
- Reduces the deduction for dividends received — from other than certain small businesses or those treated as “qualifying dividends” — from 70 percent to 50 percent.
Some large organizations have already implemented actions with their increased cash flow, from one-time employee bonuses to debt pay downs. Here’s a general list of actions that corporations could take — or have already taken — with their additional revenue. Contact your professional tax advisor for advice and information concerning your particular situation.
- Dividend increases based on changes in dividend deductions and exemptions. Since the new law provides a 100 percent deduction for the foreign-source portion of dividends, there is less incentive for American-based groups to keep excess cash overseas. Instead, companies can distribute those funds to parent companies.
- Debt pay-downs as a direct response to increased cash flow. Several major corporations have already expressed interest in paying down maturing debt with the added funds.
- Share buy-backs to prop up share prices in a tumultuous market. Since the government implemented the TCJA, corporates have bought back over $88 million in stock — more than double the amount pursued in 2017.
- Mergers and/or acquisitions also driven by repatriation of overseas cash. Corporations may be more willing to entice prospective buyers with asset sell-offs.
- Employee incentives like short-term bonuses and raises, occurred primarily before the law took effect. Many corporations have cited the tax law as incentive for providing employee bonuses and raising wages. While pension funding for 2017 is still an available benefit, it’s unclear if the trend will continue into the new tax year.
Learn to navigate the new tax code
While it only took Congress a few months to pass the TCJA, it will undoubtedly take years for organizations to adjust to the new rates. The above actions are just a few of the opportunities a short-term cash infusion can make. To best benefit from the new tax law, organizations will also need to reconsider their operational policies.
If you need help updating your treasury policies based on the TCJA, our treasury specialists can work with you to help you adjust your strategy.
Laurie Murphy serves as senior tax planning and business support director at U.S. Bank. She brings over 15 years of experience in tax planning and guidance for various business lines.
U.S. Bank does not offer tax advice. Contact your professional tax advisor for advice and information concerning your particular situation.
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