Federal tax reform puzzle: Proposals may be good fit for retailers

By Amy Drumm, MRA Vice President, Government Affairs

Retailers who file their business taxes separate from their personal income taxes, could see a significant reduction in the amount of taxes they pay if either of the two tax reform plans working their way through Congress are signed into law. That’s because retailers do not benefit from many of the tax breaks and loopholes available to other industries. Examples of these credits include research and experimentation credits used by engineering and technology firms, credits for low-income housing investments, and a deduction for domestic manufacturing.

In fact, retailers pay the highest effective corporate tax rate – at or close to the maximum 35 percent. Both congressional tax reform plans would cut the maximum corporate rate from 35 percent to 20 percent. The House would cut the corporate tax rate to 10 percent beginning in 2018 while the Senate plan would not go into effect until 2019.

The National Retail Federation (NRF) found that reducing the corporate tax rate to 20 percent could help create 500,000-1.5 million new jobs throughout the economy. Economic studies by the Joint Commission on Taxation and Ernst and Young (conducted for NRF) also found that broadening the tax base and lowering the corporate tax rate would increase gross domestic product (GDP), wages and consumer spending.

Sole proprietors and LLCs who currently report business profits on their personal income tax returns would also see some tax relief under the federal plans. Most businesses are set up as “pass-throughs,” not corporations. For these “pass-through businesses,” instead of being taxed at the individual rate for business profits, which can be as high as 39.6 percent, the House plan would charge a 25 percent rate on business profits under the House plan and a 17.4 percent rate under the Senate plan.

In addition, the federal tax reform plans would allow immediate deductions for business investments rather than spreading the deduction over multiple years. The plans also maintain the deductions for interest paid on small business loans that allow for expansion, investment and hiring workers.

The congressional plans also would adjust personal income tax rates and deductions which may provide individuals and families some tax relief. Both plans call for a nearly doubling of the standard deductions while reducing or eliminating certain itemized exemptions. You might be tempted to call it a simplification, but the House bill is still 429 pages long.

It’s important to note there is some economic debate over the impact to the national debt from these reforms. Proposed deficits under current law project a $10.1 trillion-dollar deficit over the next 10 years. Legislative supporters of the reforms claim they will pay for themselves. But economists greatly disagree on how much the increased economic activity will cover of the $1.5 trillion-dollar cost.

Before you rush off to see your accountant and start mentally spending those extra dollars, remember that Federal tax reform isn’t a guarantee. While this is the farthest a plan has come to becoming reality and business associations are the most optimistic they’ve been in decades, Congress is at best, only about half way through the process. And the really hard part starts once each chamber passes its own version of reforms and they must agree on a final compromise bill. Let’s not forget that the president has the final say in signing or vetoing a bill, IF one reaches his desk.

That’s where you can get involved. Write or call your congressman and Michigan’s U.S. Senators, Debbie Stabenow and Gary Peters. Encourage them to support tax reform that aligns with changes that would benefit both retailers and consumers as outlined by the National Retail Federation:
– Reforms should cut business tax rates and close loopholes that only benefit some industries over others.
– Reforms should not favor one type of business over another based on their legal entity (C corporation vs. pass-through), how they own their property (leased vs. owned), or distribution channel (brick and mortar vs. remote sale).
– Tax reform should not include a consumption tax (like the border adjustability tax proposed earlier this year or a national sales tax).
– Reforms should provide long-term certainty rather than temporary deductions.
– Reforms should include adequate transition rules to ensure businesses are not penalized by investment decisions made in years prior to the reform’s passage.