On December 22, 2017, President Trump signed into law what is known as the Tax Cuts and Jobs Act. This bill included substantial changes to the way every United States taxpayer determines taxable income and calculates income tax. There are many provisions in the tax bill that will impact wholesale distribution companies but the following are a few that will assist you in determining the potential impact on operations and cash flow:
- Reduction in corporate income tax rate and elimination of alternative minimum tax. The new tax bill reduces the corporate income tax rate from a maximum of 35% to a flat rate of 21%. In addition, the alternative minimum tax for corporate taxpayers has been eliminated.
- Limitation of net operating loss (NOL) deduction. Corporate taxpayers can no longer deduct NOL carryforwards without limitation or carry an NOL back to a previous tax period. The new tax bill limits that deduction to 80% of taxable income and eliminates the carryback.
- Increased deductions for purchases of qualifying business property. The new tax bill provides for 100% deduction for purchases of certain qualifying property, including certain used property.
- Elimination of deduction for entertainment expenses and reduced deduction for business meals. The deductions for entertainment, amusement or recreation activities is eliminated. The deduction for on-site meals is reduced to 50% through 2025, then completely eliminated.
- Creation of deduction for “qualified business income.” The tax bill creates a deduction for owners of businesses operating as a sole proprietorship, partnership, or S corporation.
- Limitation on deduction for interest expense. For large taxpayers, the bill created a limitation on the deduction for interest expense.
Given the potential impact of these new tax provisions, wholesale distribution companies should consider the following:
- Assess the impact of the tax rate reduction on cash flow and deferred taxes. While the rate reduction should result in more cash flow for operations, changes in the values of deferred tax assets and liabilities will also impact financial statements.
- Review NOLs to determine if taxable income will result based on the new limitations. Many start-up and turn-around companies create cash budgets which include the ability to utilize NOLs to offset taxable income. The new limitation could result in unplanned income tax expenditures.
- Evaluate current property and equipment to determine if obsolete property should be replaced or if new purchases are warranted. While basing capital decisions solely on tax savings is not prudent, tax savings might improve the economics enough to justify the expenditures.
- Review meals and entertainment policies to determine if changes are needed based on new limitations.
- Determine the impact of the qualified business income deduction on cash flow. Like the corporate tax rate reduction, tax savings resulting from this deduction could result in more cash flow for operations.
- Consider the applicability of the business interest limitation since it could impact cost of capital decisions.
If you have questions about how these provisions could affect your business, please contact Kassouf & Co.
Joel C. J0nes, CPA/ABV, CVA, CIA, CFF, CGMA Director, Kassouf & Co.