During an article brainstorming call I had with Caleb a couple Fridays ago, we both agreed that it would be interesting to ask corporate controllers and chief accounting officers what they thought of the Tax Cuts and Jobs Act, the sweeping tax legislation that was signed into law in late December. Surely they must have a lot to say about the biggest tax overhaul in the United States since 1986, right?
I sent nearly 30 emails, either directly to controllers and CAOs or to the press offices of the companies they work for, asking them to comment on the new corporate tax changes and how it might affect the jobs they do.
As responses began to trickle into my inbox, I kept hearing “The Price is Right” loser sound effect in my head. Nobody wanted to comment. Here’s a sampling of the responses I got:
We’re going to pass on your request.
At this time we are not interested in providing comment on this subject.
We are unable to comment on this issue.
I’m afraid we’re not able to meet this request at this time.
We would like to respectfully decline.
Armed with absolutely nothing for my article, I wanted to find out why controllers were being so tight-lipped about the new tax legislation and why they should even care about it. They likely haven’t had time to fully digest the complex tax changes included in the bill. That’s understandable. Or maybe they’re too swamped with the month-end close to comment?
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So, I turned to CPAs from WithumSmith+Brown and MRZ LLP for some answers. Tara Nicholson, CPA, tax senior manager at Withum, had a few theories as to why controllers are keeping quiet about the tax legislation.
“Accounting, finance, and tax departments seem to be stretched for resources now more than ever, and that was before the tax legislation,” she said. “Many of our clients are still digesting the impacts of the new accounting standards for revenue and leases. Many mid-market companies have a very lean dedicated tax department, if one exists at all, and most of them are actively recruiting for experienced tax professionals and find themselves needing to outsource much of their tax function.”
“Keep in mind also that some fiscal year-end companies are still under the gun for tax return filings unrelated to the tax law changes, and by the time you add in all the federal and state tax audits, many companies just don’t have any time to look ahead or even consider what is happening right now,” Nicholson continued.
Another reason, she said, is companies might fear that any public comment on the tax law changes could negatively affect their brand.
“We’ve seen what can happen on social media and online grassroots petitions that gain national attention overnight,” Nicholson said. “I think companies are concerned any comment might be interpreted as a political affiliation and could immediately alienate half of their customer base.”
Wesley Middleton, CPA, managing partner of Houston-based MRZ, thinks that controllers and CAOs are accustomed to receiving this information and advice from their CPAs and are currently consulting with their CPAs for advice on the tax changes.
“We’re proactively reaching out to our clients. That’s been our M.O., to go to them and say, ‘There are changes you guys need to be aware of,’” he said.
What changes are corporate clients happy about?
The most publicized change in the legislation is the reduction of the federal corporate tax rate, from 35% to 21%. The rate reduction “is certainly a huge benefit and a nice win across all industries,” Nicholson said, even though manufacturers lose their preferential additional deduction for qualifying domestic production under the previous law.
“The calculations and documentation required to satisfy the tests for the manufacturing deduction were arduous, expensive, and heavily scrutinized by tax authorities, so this overall reduced tax rate is one area of simplification, albeit it’s probably the only one,” she said.
Nicholson added that it’s a good time for companies to be in a deferred tax liability position, as the benefit of a reduction in tax rates runs through its current year income tax provision.
According to Withum Tax Partner Paul Helderman, CPA, companies are required to remeasure their deferred tax assets and liabilities as of the date the new law is enacted.
“If a company is in a deferred tax liability position and the tax rate under the newly enacted law dropped from 35% to 21%, it means that when that taxable temporary difference reverses (i.e., increases taxable income in the future), it will only be taxed at 21% versus the rate at which it was originally measured (i.e., 35%),” he told me in an email. “This ‘benefit’ is included in the 2017 financial statements of a calendar-year company. If the company was in a deferred tax asset position, the opposite occurs since when the temporary deductible difference reverses, the company would only obtain a benefit at 21% versus 35%, thus resulting in a ‘charge’ in the 2017 financial statements.”
Certain industries, such as alcohol/spirits and medical devices, are happy with the reductions or moratoriums on certain excise taxes, Nicholson said. Also, businesses are pleased about the ability to immediately expense capital improvements and that the criteria for qualifying additions was expanded, which coupled with the income tax rate reduction, “is a nice benefit to incentivize expansion and investment in the United States,” she added.
And don’t forget about the expansion of bonus depreciation to 100% for qualified property acquired after Sept. 27, 2017 and placed in service before Jan. 1, 2023. Before the new tax law was enacted, bonus depreciation generally equaled 50% of the cost of the property placed in service in 2017.
“I think you’ll see a lot of fixed-asset-type equipment acquisitions because of the 100% bonus depreciation,” Middleton said. “That’s going to be huge this year because it now applies to both new and used [fixed assets].”
Don’t get caught by surprise
While maybe not directly impacting the jobs controllers and CAOs do, there are a few other tax changes Nicholson and Middleton highlighted that could impact their company’s operations, their bosses, and some employees:
1. Interest expense limitation. Not only will deductions for interest expense be limited to 30% of the taxpayer’s adjusted taxable income, the limitation will now apply to a much broader base of U.S. taxpayers, Nicholson said.
“We’ve had to deal with limitations on interest in the past, but that was primarily limited to those taxpayers that had related-party debt and didn’t meet certain debt-equity requirements. The new limitations apply to third-party debt, as well, and it’s unclear how amounts previously disallowed under the old rules will transition to the new rules, as those amounts were allowed to be carried forward and deducted in future periods,” she said. “Not only will a significantly larger group of taxpayers need to determine their adjusted taxable income, they will now have an additional difference to track between income for U.S. GAAP and U.S. tax purposes. Fortunately, any interest currently disallowed is eligible to be carried forward indefinitely, but this is just one more item to track.”
2. Research and development expenses. Nicholson said companies are disappointed in the new requirement to capitalize research and development expenses.
“New R&D costs, while deductible for U.S. GAAP purposes, will need to be capitalized and amortized over five years for tax purposes,” she said. “This will be another book-to-tax difference to schedule out and analyze each year.”
3. Excess compensation deduction. The Tax Cuts and Jobs Act eliminated a public company’s ability to deduct annual compensation paid to a “covered employee,” which now includes both the CEO and CFO, that is in excess of $1 million. In addition, performance-based compensation and commissions are now subject to the deduction limitation.
“No matter what the character of the compensation is, the amount over a million dollars is not deductible,” Middleton said. “There’s a lot of executives who are compensated by various forms of equity, and in the past, they’ve potentially been able to deduct some or all of that. Many times the compensation is based on performance in the form of commission—maybe a guy’s a producer and is making $5 million a year and the C corporation is publicly traded. The publicly traded companies are going to lose the deduction for that compensation.”
4. Unreimbursed business expenses. Employees will no longer be able to deduct unreimbursed business expenses as a miscellaneous itemized deduction, which may catch some people off-guard next tax season, Middleton said.
“I think what’s going to happen is these employees won’t realize they’ve lost that deduction; it just hasn’t clicked with them,” he said. “So come next year, when it’s time to file their taxes, they’re going to go, ‘Wait a minute, I don’t get that?’ If you’re a salesman and you have a lot of mileage and you put it on your Schedule A as unreimbursed business expenses, you will not be getting that deduction any longer. It’s going away.”
5. Net operating loss deduction. The way companies deduct net operating losses is changing, too. The Tax Cuts and Jobs Act has limited the deduction for NOLs to 80% of taxable income.
“The changes to NOLs, while at first seemed beneficial in that newly generated losses can be carried forward indefinitely, lose some of their luster when they are only able to offset 80% of taxable income and there is no longer an ability to carryback losses to a profitable year,” Nicholson said.
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