Generally, the business community is supportive of tax reform efforts. All industries will be fighting to protect provisions in the code that are beneficial for them and, in that regard, there will certainly be winners and losers. However, companies of all sizes desire a simpler, more certain tax code with lower rates that allows U.S. businesses to compete internationally.
Of course, what (if anything) eventually reaches the president’s desk for his signature is uncertain. As the tax reform process moves forward, rumors will need to be separated from fact and everyone will be scrambling for the most accurate information. Nonetheless, AED has been positioning and preparing for the tax debate for years, and here are the top five issues that construction equipment distributors should keep at the forefront as the process unfolds.
1. Will tax reform benefit all business entities? For now, Congress and the Trump administration are committed to lowering tax rates and ensuring that all businesses, regardless of structure or size, benefit from reform. More than three quarters of AED members classify themselves as either S-corporations, limited liability companies (LLCs), or limited liability partnerships (LLPs); the remainder are C-corporations. Therefore, it’s essential that lawmakers proceed simultaneously with reform for all-sized companies and structures.
Risk: Politically, there’s bipartisan support for lowering the corporate tax rate, making it a slightly easier lift. When the tax reform process gets tough (which it will) watch out for lawmakers to focus only on C-corporations to get something across the finish line, leaving pass-throughs out of the mix.
2. Will Congress preserve the business interest deduction? The
House Republican tax reform blueprint included 100 percent expensing, but eliminated the business interest deduction. Removing the business interest deduction would increase real borrowing costs for businesses in capital-intensive industries and reduce investment and risk-taking. Combined, AED members deduct nearly $400 million in business interest annually.
Risk: Eliminating the business interest deduction would result in $1.2 trillion over a decade that can be used to offset rate reductions. That’s a considerable amount of money in an environment where lawmakers are looking for every “pay-for” available to get the rates as low as possible.
3. Will Sec. 1031 of the tax code survive? Like the business interest deduction, Sec. 1031 of the Internal Revenue Code encourages ongoing capital investment by allowing for like-kind exchanges (LKEs). Equipment distributors use LKE to help manage the tax consequences of buying and selling equipment in their rental fleets. It allows distributors to defer taxes associated with selling equipment when the sale price exceeds the tax basis and reinvest the sales proceeds into new equipment for their fleets. Nearly 25 percent of AED members use LKE, and AED estimates the aggregate LKE deferrals for AED members at $2.120 billion.
Risk: There’s an incorrect perception among some on Capitol Hill that LKEs are unnecessary with full expensing or that Sec. 1031 is a tax loophole. Estimates are that repeal would generate $40 billion over a decade – again, a sizable offset to lower the rate, but one that threatens capital investment and growth.
4. Is the “last in, first out” (LIFO) accounting method on the chopping block? LIFO is an inventory accounting method that has been used by companies in a range of inventory-intensive industries since the 1930s to manage the impact of inflation. When inventory costs are rising, using the LIFO method means less tax liability in each year than under FIFO (“first in, first out”). However, if prices fall, the taxpayer repays the LIFO benefit through greater tax liability. Nearly a quarter of AED members use LIFO, and AED estimates combined reserves at more than $383 million, creating substantial tax exposure should it be repealed.
Risk: Repeal could raise as much as $75 billion to support
lowering the rate. LIFO has been in the cross-hairs for more than a decade and while lawmakers generally understand its benefits in an environment where rate reduction is prioritized, LIFO is in a precarious position.
5. Will Congress pass up the opportunity to increase infrastructure investment? Infrastructure is critical to America’s economic growth and competitiveness. Gas taxes and other highway user fee revenues are insufficient to support even the current inadequate level of transportation investment, let alone the additional construction needed to rebuild America’s crumbling infrastructure. Without new revenues, the highway program is in true jeopardy. The gas tax was last increased – to 18.4 cents per gallon – in 1993. Congress must create new Highway Trust Fund revenue streams through a gas tax increase, a vehicle-miles-traveled tax, or some other innovative solution.
Risk: The last time the federal gas tax was raised was as part of a broader budget and tax reform deal. Conventional wisdom is that, politically, it’s the best time to do it again. If Congress does enact comprehensive tax reform without infrastructure investment, it will be a major missed opportunity that will result in greater uncertainty in construction markets.
The tax reform process will be long and difficult and all current tax provisions will be on the table to lower rates. Consequently, AED will advocate on your behalf to ensure that any final tax reform package is a net gain for equipment distributors and manufacturers.