Companies should brace for change.
The 30-plus-year drought since the last tax code overhaul may be finally over as Congress sets out to vote on and place a now-finalized tax bill on President Donald Trump's desk.
The bill slashes the corporate tax rate from 35% to 21%, and also includes massive changes to how income earned or kept offshore is treated.
In other words, this week could be monumental for business accounts nationwide. Every industry could see effects — including business technology. Here's a 60-second overview of what the bill could change and where industry associations stand on it:
IMPACT: Tech companies with large overseas cash holdings will benefit from cuts to corporate tax rates, but SMBs and companies with larger domestic holdings may not be as lucky.
POSITION: Big tech lobbied hard for a cut to the corporate tax rate, but the loss of R&D tax breaks and new income tax applications on grad students may undercut the win.
ANALYSIS: The corporate tax rate currently sits at 35%, but the tech sector on average pays much lower than that. For example, the average tax rate is about 16% for computer services companies and about 25% for internet software companies, according to Aswath Damodaran, professor at the Stern School of Business professor. Moving the overall rate down to 21% may not benefit tech as much as other sectors since the industry already has lower rates.
The lowered, one-time repatriation tax, however, will have a greater effect. Tech tops the list of U.S. companies with the largest overseas cash holdings. More than $564 billion is held abroad between Apple, Microsoft, Cisco, Alphabet and Oracle — $246 billion of which belongs to Apple alone.
The tax levied on overseas cash will drop from the current 35% corporate rate to 15.5% under tax overhaul. Less liquid assets will be taxed at 8%. For companies without large overseas cash holdings, the benefits are less substantial.
THE BIGGER PICTURE
The tax overhaul does not just affect technology. Here's how the bill may alter other industries.
IMPACT: Tax reform is expected to impact several areas of interest to HR: paid leave, fringe benefits, automation and offshoring.
POSITION: The tax proposal could, on balance, be good for companies and in turn good for HR professionals. The industry has not taken a specific stance on the issue to date.
ANALYSIS: Tax reform is expected to impact several areas of interest to HR including some core issues such as paid leave, fringe benefits, automation and offshoring.
One proposal would give employers a tax credit equal to 25% of an employee's salary if it paid them during FMLA leave. There are several proposals to scrap deductions for benefits employers often are involved in, like transportation and relocation expenses.
Some thought the bill might create new tax incentives to encourage employers to create jobs. (That's what the Trump administration promised, after all.) Instead, it proposes to allow employers to write off the full value of machines right away, perhaps encouraging automation without an accompanying incentive for hiring humans.
The bill proposes to exempt some income from U.S. companies with operations outside the country. This encourages business to send work overseas, some experts have said.
HR will probably like the paid leave proposal, as it gets at an existing problem without a mandate. Instead, it's an incentive to do something many are already doing anyway. On the flip side, the fringe benefit exclusions do the opposite, creating a disincentive for employers to offer those benefits.
The automation and offshoring items are, on their face, good news for companies. Some, however, say they're not as useful without an incentive to hire people, too. After all, machines can't be upskilled when needs shift.
Kate Tornone / HR Dive
EDUCATION: HIGHER ED
IMPACT: Higher ed leaders are watching closely to see how impacts to itemized deductions will impact charitable giving, and many are concerned a number of changes would decrease state appropriations while increasing the tax burden for the industry's largest institutions.
POSITION: Because of the broad differences in the sizes, budgets and missions of higher education, there are differing positions on the legislation. However, many of the largest and wealthiest institutions may see a greater impact to their bottom lines via endowment taxes and new taxes on the top-paid officials, and smaller institutions are keeping a close eye on how charitable giving changes will impact day-to-day operations.
ANALYSIS: Some of the biggest concerns in the tax bill for higher education leaders are the proposed endowment tax for private institutions; the changes to individual deductions, including changes to the way charitable giving can be itemized and the ability to deduct state and local income taxes; and the elimination of private activity bonds that can impact college and university foundations that are involved in real estate.
The bill also proposes a 21% tax on the top-five paid individuals with salaries over $1 million at nonprofit organizations, which puts institutions on the hook for paying a tax on the salaries of the president and men's basketball and football coaches.
The inability to deduct state and local income taxes still worries many higher ed administrators that there will be pressure on states and localities not to raise taxes, which means that though some individuals may see an increase in net earnings, there will be increasingly tough decisions about discretionary funding in state houses — and further cuts to higher ed at the state level.
And though individuals will still be able to deduct charitable gifts, the required threshold for itemization would mean an estimated loss of $12 billion to $20 billion per year for the industry starting in 2018. And the elimination of the 80% deduction for seat licenses at college sporting events may mean athletics departments lose a major incentive for potential program donors as well, which could shift some of the athletics budget burden back to the institution.
While tuition waivers are saved from taxable income and the committee agreed to preserve the ability to deduct student loan interest, there are still a number of provisions that will impact institutions if this bill is passed.
Autumn Arnett / Education Dive
IMPACT: A cut in the corporate tax rate could increase cash flow, allowing more investment in technology, business expansion and new jobs along the supply chain.
POSITION: Manufacturers and freight industries are for the bill, but ports and airlines have some reservations.
ANALYSIS: For business, the tax overhaul bill appears to deliver. Increased cash flow from a lower tax rate could prompt the different modes of freight and 3PLs to invest more in supply chain visibility tools, predictive analytics and blockchain alliances.
But if signed into law, the bill would also tax companies for making payments to foreign companies, which could hurt the global supply chain.
In that respect, the bill is a bit of a mixed bag. While the bill may spur expansion and job growth for big and small American businesses, the bill's "America First" slant could pose serious difficulties for supply chain managers dealing with foreign suppliers, 3PLs or carriers.
The bill will disrupt supply chains, affecting the flow of supplies and products and potentially making it more expensive for American companies to do business and trade with foreigners. While it's too soon to know whether the lower tax rate will compensate for that provision, supply chains are in for a shakeup in 2018.
Kate Patrick / Supply Chain Dive
IMPACT: A likely flurry of investments in short-term infrastructure upgrades could lay the foundation for the next big leap in digital disruption where powerful online access and sophisticated data-mining become so prevalent that customized, service-driven engagements are possible just about anywhere consumers are.
POSITION: The marketing industry has largely remained silent on the tax bill, in part because the impact won't be clear until the final version receives approval.
ANALYSIS: The proposed corporate tax cut may be minimized for businesses like Google, Facebook, Amazon and Procter & Gamble — the world's largest advertiser — as they've already taken steps that reduce their effective tax rate in the U.S. Despite this mitigating factor, the tech giants will still see savings as high as $2.28 billion for Google, $1.56 billion for Facebook and $723 million for Amazon, per Cowen senior research analyst John Blackledge.
This windfall coupled with a provision that would allow any company to write off capital expenditures — costs that are currently written off over the course of several years — could result in a jump in investment in short-term infrastructure upgrades, as the provision expires after five years. In fact, Blackledge predicts that Google, Facebook and Amazon will spend a combined $234 billion in capital expenditures from 2018 to 2022 because of the expensing provisions in the bill, with Facebook having already announced plans to double its reinvestment next year.
The introduction of a territorial tax system, which the bill is likely to include, means U.S.-based companies with overseas operations would no longer be required to pay U.S. corporate taxes on a portion of or possibly all foreign profits. As a result, some of the infrastructure investments could take place outside the U.S. as these companies look to bolster their international operations.
Already, we've seen Facebook announce that it's shifting how it records advertising revenue — by and far its biggest source of revenue — to a local selling structure. While positioned as a move to provide the kind of transparency local governments are demanding about how much revenue local ad sales generate, the move also appears to better position Facebook to increase overseas investments and take advantage of a territorial tax system.
Retailers and telecommunications companies are among those who could take a hit from the bill as many carry a significant amount of debt, and the bill is likely to cap the amount of deductible debt interest at 30% compared to the 100% now allowed. This could undermine an already-fragile brick-and-mortar retail sector.
Chantal Tode / Marketing Dive