Retail Reckons With Potential Tax Reform

On April 26, Treasury Secretary Steve Mnuchin and National Economic Council Director Gary Cohn outlined the President’s vision for a tax overhaul, with significant potential implications for both individuals and businesses. Though the plan remains skeletal at best, several points stand to impact retailers, should the framework make its way further through Capitol Hill.

Busting the Business Rate
Included in the White House’s proposal is a reduction of the corporate tax rate from 35 percent to 15 percent for businesses of all sizes. However, many tax professionals are unsure this will come to pass. During BDO’s recent webinar, “Trump, Legislation and Taxes: How the Expected Tax Reform May Impact Global Organizations,” 63 percent of the more than 500 tax professionals who attended the webinar predicted the corporate rate will land in the 20s, 34 percent of respondents said it will fall somewhere between 20 and 24 percent and just six percent predicted the tax rate will fall between 15 and 19 percent.

A shift to a 15 percent corporate tax rate would likely have enormous consequences. According to BDO’s 2017 Tax Outlook Survey, a reduced corporate tax rate is the primary tax issue for tax executives, no matter the industry. Some retailers suggest that the new rate must fall to at least 22 percent to have a net positive effect.

The administration touts this plan as an overall simplification of the code—which should benefit taxpayers if all goes as planned. However, the lack of details leaves room for much uncertainty on many fronts including exactly how it will be applied to a pass-through business.

Reform with A Side of SALT
Interestingly, a significant drop in the federal income tax rate under the president’s plan could cause state income taxes to become a much higher proportion of taxpayers overall tax burden. In addition, it is unclear whether specific states would conform to any base-broadening measures such as the elimination of the federal interest expense deduction.

As the plan remains quite ambiguous, many state and local questions must be considered. For example, will federal tax reform encourage more states to abandon their income tax regimes for gross receipts taxes or other indirect tax regimes? How will states treat any one-time repatriations of foreign earnings? As the reform package makes its way through the legislative process, taxpayers may get some much needed clarity.

Prepare to Prepare
While Congress works its way from one tax reform proposal to the next, the best way to prepare for what may be ahead is to stay informed.

For more information on how tax reform may impact retailers, contact Mike Metz at mmetz@bdo.com. Be sure to keep up with the latest on tax reform and retail by subscribing to our blog on the Consumer Business Compass homepage here, and follow us on Twitter at @BDOConsumer.

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