The future shape of the U.S. tax system remains one of the biggest uncertainties businesses face. Yet no matter what Congress does—or doesn’t do—about the U.S. tax code, companies need to be prepared and have a strategy in place.
Right now, it’s unclear whether Republicans can even agree on the scope of tax reform. The possibilities range from a transformative overhaul to basic tax cuts to no changes at all.
President Trump and Congressional Republicans want to cut taxes for both businesses and individuals. But a key sticking point is whether the tax cuts will be “revenue neutral”—balanced enough so they don’t increase the federal budget deficit.
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There is a general consensus that tax rates can be cut by eliminating many deductions, credits, and other tax preferences. But for businesses, the issue is complicated—with hard choices between lower rates on the one hand and fewer targeted tax benefits on the other.
Even if tax reform is “revenue neutral,” it still almost surely creates winners and losers. Some will pay more tax, others will pay less. Companies have to take all this into account when trying to make key decisions about business strategy, investment, and staffing.
Timing is another key issue. Even if there is a general agreement on the size and shape of tax reform, it could take months to hammer out a bill and get it passed by Congress.
Both simplifying and complicating matters simultaneously, legislators appear headed towards making tax changes under a process known as “budget reconciliation.” Although this process allows lawmakers to pass legislation by a simple majority vote, a number of arcane rules result. One in particular—namely that the bill could not add to the deficit in the long term—could force Congress to make difficult decisions: raise taxes enough to prevent an increase in the deficit or alternatively make the tax relief temporary only.
The Trump administration, meanwhile, maintains compatible, but not identical views of tax reform. For businesses, that would include lowering the corporate tax rate to 15 percent, taxing companies on their U.S. rather than worldwide revenue, imposing a one-time tax on repatriated profits currently parked abroad, and eliminating unnamed tax breaks for special interests.
So how can businesses be prepared? Given the possibility that tax reform could happen in the next few years, companies should do the following:
Follow key developments. Companies need to develop a strategy for monitoring ongoing legislative developments. Things this fall are likely to be fluid and fast-moving.
Assess potential impact. Consider how tax reform proposals might affect specific parts of your business, as well as the potential impact on future plans. Develop a high-level economic model.
Adjust current planning. Include possible tax reform in ongoing plans. Consider the company’s overall tax burden as well as broader effects on a company’s products, business model, the competitive landscape, and the economy.
Have a transition plan. Develop a strategy for how your company could make the transition to a significantly different tax system.
Find potential allies. For areas of significant concern, team up with like-minded businesses, trade associations, and industry groups to seek changes.
Communicate with Congress. Decide which issues are most important and make sure legislators know.
Tax reform has the potential to make fundamental changes in how companies do business. Because of this, companies need to keep track of key developments and be ready to adjust their business strategies accordingly.
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