Corporate Tax Rate Reduction

The start of a new year always brings about fresh possibilities and resolutions. This year, in 2018, the American economy was given fresh possibilities by way of the tax bill that was passed just before the new year.

The Cut

Joe Harpaz, a Contributor for Forbes, explains that “at roughly 500 pages, the bill contains hundreds of changes to the U.S. tax code, re-configuring everything from individual income tax brackets to the individual mandate requiring every American to carry health insurance. But the real star of the show is corporate tax.”

The reason for corporate tax getting so much positive attention is because the rate was lowered from the current 35% to 21%, according to Forbes.

Craig Richards for the Fiduciary Trust International details that the bill “attempts to encourage capital spending by allowing companies to immediately deduct 100% of their expenses for qualified property that is purchased between September 27, 2017 and January 1, 2023.”

The Reaction

No matter an individual political opinion, a lessened corporate tax rate that spurs on business and helps grow the economy is a plus.

Dinesh Kanabar for The Economic Times says that the bill makes the “US corporate tax rate extremely competitive and will promote substantial growth.”

The New York Times’ Jim Tankersley, Thomas Kaplan and Alan Rappeport explain that “the bill is heavily weighted toward business, which would receive about $1 trillion in net cuts…”

Tankersley et al. included Speaker Paul Ryan’s opinion: “with this plan, we are making pro-growth reforms, so that yes, America can compete with the rest of the world…”

The U.S. Chamber of Commerce’s Chief Policy Officer, Neil Bradley, refers to the bill as a “home run for economic growth,” according to The New York Times.

In an article for the Wall Street Journal, Richard Rubin and Siobhan Hughes noted that business groups are “praising the decision to cut the corporate tax rate starting next year as well as the elimination of the corporate alternative minimum tax.”

Andrew Schmidt, an accounting professor from North Carolina State University who concentrates on taxes, was featured in the WSJ explaining that “unquestionably, these guys have to be jumping for joy…I can’t think of any business-oriented group that has not been pushing for this for the past 15 years.”

Perhaps a central reason for the passage of this tax bill is a compilation of all these reactions, and is embodied in President Trump’s opinion, found in the Wall Street Journal: “our current tax code is burdensome, complex and profoundly unfair.”

An Arduous Implementation

Because of the intricacies of the complex bill, the actual implementation of the new tax bill will require quite a lot of work. Aspects of a company’s finances that will be affected, according to Forbes, are global trade strategy, earnings forecasting and capital expenditures.

Foreign/Offshore Money

Harpaz explains that the tax bill “also contains special provisions that let U.S. companies repatriate their foreign earnings back into the U.S. at a reduced tax rate.” The reduced rate that Harpaz mentions is 12% for cash and 5% for illiquid assets, as explained by Richards in the Fiduciary Trust International.

The result of this, explains Kanabar, is that “US corporates will have no incentive to leave profits overseas, and would rather get them to the US.” The impacts on foreign money is important as the more money that comes back to the US, the better off our economy will be.

Going into more detail, Richards discusses that “any dividends a business receives from an overseas subsidiary could also be deducted as long as the company owns 10% or more of the foreign corporation.”

Tankersley et al. for The New York Times delves into the reasoning, discussing that “the effort is aimed at preventing companies from shifting profits abroad and grabbing back some of the tax revenue on income earned overseas…the White House has said more than $2.5 trillion in American profits are held offshore.”

The bill is not only structured to provide incentives to bring back foreign/offshore money to America, but it includes a financial penalty for sending money back overseas. Tankersley et al. note that “it would also force American subsidiaries of foreign-owned companies to pay a 20 percent excise tax on any payments send back to foreign affiliates.”

In discussing steps that companies should take, Deloitte suggests that “companies should confirm there is appropriate documentation of existing E&P, tax pools, and foreign tax credit carryforwards.”

Responses and Suggested Steps

Joe Harpaz spoke with a group of well over 1,000 tax professionals that work on corporate and trust taxes and found that about 30% are taking a “wait and see” approach to the changes that will be coming forth from the bill, about 14% are explaining the impacts to their company and about 5% are discussing the tax bill with their senior management and Board.

Just like last month’s GAAP change article (https://wp.me/p7umfi-22) explained, it is very important to keep upper management, the Board, and key stakeholders in one’s company abreast of salient financial updates and changes.

Deloitte highlights that the “bill would require companies to remeasure their deferred tax assets and liabilities as of the date of enactment. Any tax effects resulting from enactment would need to be accounted for in the reporting period of enactment.”

A second recommendation from Deloitte is that “companies should confirm there is appropriate documentation to support adjustments to the resulting deferred tax, income tax payable or income tax receivable balances.”

The same group of tax professionals that Harpaz spoke with also elaborated on how their accounting strategies will be reformed. As he reported it in Forbes, “59% said they were already considering near-term actions…11.2% said they are planning to accelerate or defer expenses, 4.1% are planning to address their offshore assets…”

It will take awhile for each company to become adjusted to the intricacies of the new tax bill, but 2018 is starting with a corporate tax cut that will create business incentives and maintain a strong economy.

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Sources:

Harpaz, Joe. “Corporate Tax Pros Already Prepping for Tax Reform.” Forbes, 18 Dec. 2017. <https://www.forbes.com/sites/joeharpaz/2017/12/15/corporate-tax-pros-already-prepping-for-tax-reform/#7b54e584481a>

Kanabar, Dinesh. “Corporate taxation: Prepare for a US homecoming.” The Economic Times, 18 Dec. 2017. <https://blogs.economictimes.indiatimes.com/et-commentary/corporate-taxation-prepare-for-a-us-homecoming/>

“Preparing for Tax Reform: Action items necessary to record financial statement impact.” Deloitte, 18 Dec. 2017. <www2.deloitte.com/content/dam/Deloitte/us/Documents/Tax/us-tax-preparing-for-tax-reform-11.16.2017-web-version.pdf>

Richards, Craig. “Ready for Tax Reform? How to Prepare for the Unknown.” Fiduciary Trust International, 18 Dec. 2017. <http://www.fiduciarytrust.com/insights/commentary?commentaryPath=templatedata/gw-content/commentary/data/en-us/en-us-ftci/tax-planning/nov-8-2017-ready-for-tax-reform-how-to-prepare-for-the-unknown&commentaryType=TAX%20PLANNING>

Rubin, Richard and Hughes, Siobhan. “House, Senate Republicans Reach Deal on Final Tax Bill.” The Wall Street Journal, 18 Dec. 2017. <https://www.wsj.com/articles/house-senate-republicans-reach-deal-on-final-tax-bill-1513185360>

Tankersley, Jim et al. “Republican Plan Delivers Permanent Corporate Tax Cut.” The New York Times, 18 Dec. 2017. <https://www.nytimes.com/2017/11/02/us/politics/tax-plan-republicans.html>

Q4 Projections and 2018 Forecasting of the Job Market

November is a month that brings the arrival of many things: Thanksgiving, the precipice of the holiday season and the realization that 2018 is almost here. In terms of the job market, Charles Schwab explains that Q4 connotes budget discussions, personnel adjustments and year-end money management. Thankfully, these corporate agenda items will be discussed in the midst of the continuing bull market.

But First, Some Q3 Notes

ADP made some interesting notations about Q3 performances in their “Workforce Vitality Index.”

They noted that the companies making the most hiring were the ones that had fewer than 500 employees.

ADP also found that the strong vitality growth in the construction and manufacturing industries has contributed to men having vitality that hasn’t been this strong for three years, even exceeding the vitality of women.

Strong Q4

“The market has been very strong over the last few years with our clients looking to hire top talent before the end of the year. And plenty have had the budget to do so,” explains James Martinos, Client Account Manager and Senior Recruiter with Friedman Williams.

Experts from Charles Schwab agree.

Historically since 1952, Charles Schwab experts Liz Ann Sonders, Brad Sorensen and Jeffrey Kleintop explain that November and December remain among the strongest performing months of the year.

James has found that in his experience Q4 has been “consistently strong” and he is expecting this one “to continue the recent Q4 trend with the budget and head counts being strong for hiring. The need to hire qualified candidates with the overall profit growth of companies is driving the market.”

Sonders, Sorensen and Kleintop reference the Job Openings and Labor Turnover Survey as reflecting job openings topping over six million, a banner rate.

Prosperous Job Market

Survey participants of Dr. Richard Curtin, Director, Surveys of Consumers at University of Michigan and Brilliant corroborate the same results while also detailing important predictions for Q4.

The survey findings were of over 850 hiring managers and human resources personnel that hire within accounting, finance and information technology. Respondents predict job openings remaining prosperous with also reflecting the most successful hiring being done through recruiting firms.

An interesting survey conclusion is that the participants noted that corporate accounting jobs such as financial analysts and tax accountants were the most common accounting and finance job openings, with software development and database administrators being the most common in IT.

Christopher Lee, National Group Manager for Friedman Williams, feels that “leadership positions and client facing roles are more and more available; a slow-down in hiring is not what is ahead.”

Not only will the job market be plentiful but the rate at which companies will be making these hiring decisions will be fast.

Quick Hiring Decisions

“If we have the right candidate, our clients are moving very quickly,” states Martinos of Friedman Williams.

The Curtin/Brilliant survey data makes the same conclusion that “nearly all open positions are of recent origin. Of the 38 percent of businesses that reported open accounting / finance positions, 34 percent have been unfilled for 3 months or less.”

These rates support the current successful job market as employees feel comfortable to make job changes knowing that competitive salary and benefits will be offered and, oftentimes very significant to candidates, a quick hiring decision will be made.

Q4 Skills to Improve

When looking for a job change, deficiencies in current skills are highlighted for candidates as they move through the interview process (if there are any). Survey participants were asked to identify the biggest skill gaps and within accounting and finance, the largest was problem solving, followed by communication. This shows that not only are technical skills important but so is the ability to translate information and opinions.

An important notation about skills within the hiring process is made by Lee’s 2017 experience: “The battle of talent is always a crucial one for clients. Many clients are driving their hiring with the most interpersonally qualified candidates, even if they are lacking some of the technical proficiencies needed for a position. They desire the will, the drive for learning and the demonstration of a focused work-ethic and can train in areas not yet developed. This has been even present in 2017 and I see this trend continuing in 2018.”

Harvey, Irma and Maria

As strong and stable as Q4 is projected to be, the recent hurricanes will have an impact on the economic data, albeit not at an overwhelming rate. Charles Schwab explains that since the economic numbers have been steadily increasing, rebuilding in the affected areas may constitute a short bump, but will overall not largely affect the economic numbers other than a slight downward curve. In their National Economic Outlook of September 2017, The PNC Financial Services Group noted that gasoline prices were most affected by Hurricane Harvey this past September.

Q4 Glass Half Full

As with any optimistic outlook, there are usually cautionary factors to consider. Charles Schwab thinks that the bull market is here to stay for the time being and will begin to change to a bear market when the stock market begins to sense a recession.

Tight Labor Market

PNC and the Curtin/Brilliant survey are reporting on the tightening of the labor market.

James Martinos has found that in his experience “great candidates are always in need, more so now than ever. The labor market for highly qualified candidates is thin and our clients are relying on us more than ever to find the skilled candidate for their open positions.”

James’ experience supports the survey result of recruiting firms having the most placement success. As the survey points out, companies oftentimes have to pay a higher salary to replace an employee than if they were continuing that person’s modest wage increase.

Inflation as a Factor

Charles Schwab explains that the factor of inflation could come into play in Q4: the “key to watch will be whether traditional measures of wage inflation starts to take hold…” Charles Schwab expert Kleintop further investigated the issue of inflation and found that the current bull market may be undermined if central banks aggressively anticipate inflation through the tightening labor market, specifically the global labor market. He explains that since the current unemployment rate hasn’t been this low since 2001, wage inflation can start to increase at a faster rate next year if unemployment dips even further.

Thumbs Up for Moving Forward

In their Economic Outlook, Edward Jones assesses the current economic climate as indicators for what will most likely happen in the near future. They anticipate the economy to experience continued growth with regulatory relief, confident consumers, low interest rates, wages continuing to modestly grow and increases in spending due to the unemployment rate lowering.

The possibility of tax cuts may even improve the 2018 numbers even more if it comes to fruition.

Christopher Lee anticipates that “projects and initiatives are continuing from the previous year and being green-lighted for the current year. Our business is accustomed to seeing an uptick in hiring during this time of year; our clients want their new and key team members in place early in the year, helping to drive these projects forwards towards the desired results.”

2018 By the Numbers

The PNC Financial Services Group published their National Economic Outlook this past September and their findings align with those of Edward Jones. They anticipate the Real GDP to increase as well as the amount of payroll jobs (Real GDP has been increasing steadily since 2016).

PNC details that “with solid fundamentals for consumer spending, business investment, and the housing market, the U.S. economy will continue to expand throughout 2018. Real GDP growth will be 2.2 percent in 2017 and accelerate to 2.7 percent in 2018, with support from rebuilding, expected tax cuts, and an expanding global economy.”

In terms of the job market, no matter what year or time of the year, Lee explains that “our recruiters know that constant education and reinforcement of critical market information leads to everyone’s desired career results.”

In short, the current and predicted near future is ripe for exploring the job market and feeling confidence about how the stock market has and will continue to perform.
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Sources:
“ADP Workforce Vitality Index 3rd Quarter 2017.” ADP, 20 Oct. 2017. <http://workforcereport.adp.com/2017/3/wvi.aspx>

“Economic Outlook.” Edward Jones, 5 Oct. 2017. www.edward jones.com/market-news-guidance/quarterly-market-outlook/economic-outlook.html

Faucher, Gus, et al. “September 2017 National Economic Outlook.” The PNC Financial Services Group, 5 Oct. 2017. <pnc.com/content/dam/pnc-com/pdf/aboutpnc/EconomicReports/NEO%20Reports/NEO_092017.pdf>

Kleintop, Jeffrey. “Infation May Be The Biggest Question For Investors in 2018.” Charles Schwab, 5 Oct. 2017. <https://www.schwab.com/resource-center/insights/content/inflation-may-be-biggest-question-investors-2018>

Kleintop, Jeffrey, et al. “Schwab Market Perspective: Fourth Quarter Fun…of Folly?” Charles Schwab, 5 Oct. 2017. <https://www.schwab.com/resource-center/insights/content/market-perspective>

Lee, Christopher. Personal interview. 9 Oct. 2017.

Martinos, James. Personal interview. 9 Oct. 2017.

Wong, Jim. “Brilliant Q4 2017 Accounting, Finance and Information Technology Hiring Forecast.” Brilliant, 5 Oct. 2017. <BFS_2017_Q4_HiringForecast_WEB.pdf>