Tax Reform: Possible Impact on Manufacturing and Retail Businesses

Posted on 02.24.17

Tax Reform: Possible Impact on Manufacturing and Retail Businesses

By Gary G. Wallace, CPA, Tax Partner | Manufacturing, Distribution and Retail Team

The 2016 election has drawn attention to the very real possibility of major tax reform. 

While most taxpayers would feel at least some impact from income tax changes, several proposals have drawn significant attention from manufacturers and consumer related businesses.  Although it is very early in the political agendas, several proposals are being highlighted because of their direct impact on this sector.

Corporate Tax Rates.
US manufacturers have lobbied for tax reform citing global inequities with our current system.  National Association of Manufacturers (NAM) indicates “Our nation’s tax system, with extremely high rates, a host of temporary provisions and out-of-date international rules, has created an uncertain environment that undermines manufacturers’ ability to compete and succeed in the global marketplace.”  The President and Congress have heard this argument from many constituents and corporate tax rate reduction may be the cornerstone of any tax reform, with rate reductions from 35% to 20% being discussed.

Full Expensing.
Manufacturers, retail and consumer companies would benefit from full expensing of tangible and intangible property in some of the recent proposals.

Inventory.
A major question is whether last-in-first-out (LIFO) inventory will be retained for tax purposes. LIFO has been on the “chopping block” as a revenue raiser in most tax legislation in recent years, however, it has consistently been “saved.”  The current House Republican tax reform ‘blueprint’ states that the LIFO inventory method will be retained.  However, it remains a target in any tax legislation as a potential budget offset.

Border adjustment tax.
One concern for manufacturers and consumer businesses is the impact of the so called “border adjustment” system.  This system would have the impact of an additional tax burden for any businesses that import goods and services.  In today’s global supply chain, this could be very costly not only for the tax consequences but also for the accounting administration.  In defending the border adjustment concept, Sean Spicer, White House Press Secretary, indicated “I think when you look at the plan that's taking shape now, using comprehensive tax reform as a means to tax imports from countries that we have a trade deficit from, like Mexico … If you tax that $50 billion at 20 percent of imports — which is, by the way, a practice that 160 other countries do — right now our country's policy is to tax exports and let imports flow freely in, which is ridiculous. But by doing it that way we can do $10 billion a year and easily pay for the wall just through that mechanism alone. If you think about what a tax — a border tax on imports from countries like Mexico that we have a huge trade deficit does, that's really going to provide the funding.”


Whether or not substantial tax reform will occur in the foreseeable future is a question that we will continue to analyze and follow closely.

We have not had major tax reform since 1984.  However, tax reform has been actively studied and discussed for the past six years by Congress.  According the American Institute of Certified Public Accountants (AICPA), “The current Congress and 45th president face some better odds than existed in 1984 in that Congress and the White House are controlled by the same party, and six years of testimony, reports and proposals exist. In addition, data from the Congressional Budget Office and Joint Committee on Taxation can help in crafting a revenue neutral bill, as has been suggested by most players. The House Republicans released a tax reform blueprint in June 2016 and have been working to convert it to legislative language. Thus, there is a lot in play for tax reform likely to occur in 2017 or 2018.”

Until then, we will just need to monitor the pulse of Congress and our Twitter accounts.  “Meeting with biggest business leaders this morning. Good jobs are coming back to U.S., health care and tax bills are being crafted NOW!” — President Trump tweet, February 3, 2017

Questions on this topic? Contact your Keiter representative or 804.747.0000 | Email.

The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.

Posted by: Gary G. Wallace, CPA

Gary provides tax services to public and private entities and their owners in a variety of industry segments, including manufacturing, retail, real estate, and financial services.  Gary has significant knowledge and experience in individual taxation, business taxation, including C and S corporations and partnerships.  He advises clients on all aspects of tax matters, including tax accounting methods, multi-state tax matters, mergers and acquisitions, income tax accounting and representation with tax authorities. He is the leader of the Firm's Tax Practice and a leader in the Firm’s Manufacturing, Retail and Distribution industry team.