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GOP Tax Plan

How the Tax Plan Affects Business: Everything You Need to Know

Industries from retail to manufacturing stand to benefit from the new legislation, while a few, like Realtors, will take a hit.

Published Dec. 19, 2017 at 8:30 p.m. ET

Retail

By Sarah Nassauer

As an industry that pays one of the highest average corporate-tax rates, retailers are set to be one of the largest beneficiaries of the new tax legislation, which lowers the rate to 21%.

Retailers have mostly U.S.-based operations and little manufacturing or research and development, so they don’t usually benefit from deductions on those activities. According to data from PwC, retailers paid an average tax rate of 30.6% in 2016, the highest of any industry tracked by the consulting firm.

The tax cut could have significant effects on an industry spending heavily to fight Amazon.com Inc. and adapt to shifting consumer habits. Traditional retailers have generally paid higher taxes than online retailers like Amazon, which can often place intellectual property in countries with lower rates and benefit from deductions given to companies that don't earn a profit.

Most retailers have pushed hard in favor of the Republican tax plan since beating back a border-adjusted tax clause included in early proposals that would have imposed taxes on imported goods. The majority of retailers sell large amounts of imported products, so any such tax would have eaten away at earnings and resulted in higher costs that retailers said would have to be passed to consumers.

The biggest beneficiaries will be U.S.-based ones that derive the majority of their profits in the U.S., including Planet Fitness Inc., department stores such as Macy’s Inc. and Kohl’s Corp. and some apparel retailers, Cowen & Co. said in a research note Monday.

Home Depot Inc. said earlier this month that the 20% cut proposed in one version of the bill would boost its profit by around $1.6 billion and that it would use the money to improve stores, add e-commerce capabilities and raise wages, as well as do shareholder buybacks “or whatever the best form is to return it to shareholders,” Chief Executive Craig Menear said in an interview earlier this month. Under the current tax code, Home Depot expects an effective tax rate of between 36% and 37% for the current fiscal year, said a spokesman.

Realtors

By Laura Kusisto

The National Association of Realtors, one of the largest and wealthiest lobby groups in the U.S., is among the biggest losers in a tax-code overhaul that wipes out decades-old perks designed to encourage homeownership.

By almost doubling the standard deductions for individual and joint tax filers, the legislation blunts the advantage of the mortgage interest deduction, which is often a key factor in homebuying decisions, particularly in pricey markets. The legislation also caps the deduction for state and local taxes at $10,000, a blow to homeowners in high-tax states.

Taken together, the changes diminish significantly the perks of homeownership built into the tax code. At least 23 million fewer U.S. homeowners will be incentivized to buy a home under the new rules, according to home-search website Zillow. The share of homeowners who are likely to itemize and therefore take advantage of the mortgage interest deduction is expected to decline to about 14% from about 44%, according to Zillow.

“There’s really no difference between owning and renting in the tax code anymore for most Americans,” said Ed Mills, a Washington policy analyst at financial-services firm Raymond James & Associates.

NAR President Elizabeth Mendenhall said in a statement the Realtors “remain concerned that the overall structure of this bill poses problems for homeowners and the broader housing market.”

At peak impact, U.S. home prices will be about 4% lower in the summer of 2019 than if there had been no tax changes, according to an analysis by Moody’s Analytics. In pricier markets in states like New Jersey, New York, Illinois and Pennsylvania, prices could fall by as much as 10%, according to Moody’s.

Health Insurers

By Anna Wilde Mathews

Health insurers, an overwhelmingly domestic industry, will reap enormous benefits from the tax bill’s sharp cut to the corporate rate.

Analysts project that the companies initially could see sharp increases in earnings—perhaps in the 15% to 20% range, said Ana Gupte of Leerink Partners LLC. “It’s huge,” she said.

She suggested that insurers are likely to find a variety of outlets for the additional cash, including share repurchases, dividends, investing to grow their businesses and merger activity, which would come on top of a fast pace of managed-care deals already under way.

Many nonprofits in the industry, a category that includes most Blue Cross Blue Shield insurers, also will see a drop in their tax bills, but not as large. The nonprofit Blue insurers do generally pay federal taxes, analysts said, but often at lower rates than their for-profit competitors.

Over time, the tax-cut windfall could shrink. Shawn Guertin, chief financial officer of Aetna Inc., told analysts the “immediate benefit…would be large,” but then cautioned that it could be chipped away somewhat by rules in the Affordable Care Act that dictate a minimum share of premium dollars that must go toward health costs. He also said that the extra margin would be trimmed over time as insurers used it to push down rates in competitive markets.

Another aspect of the tax legislation could increase the challenges for some insurers, by ending enforcement of the ACA’s individual insurance mandate. Insurers generally believe that the upshot would be to shrink enrollment in ACA plans, particularly among healthy people who don’t receive federal subsidies to help with their premiums. That could lead to an increase in premiums, adding to the instability in a market that has already faced years of upheaval, insurance officials say.

Because the mandate repeal doesn’t take effect until 2019, insurers would have time to raise rates to account for the extra risk, or withdraw from the ACA market, as many have already done.

Insurers are looking ahead to other legislation they hope might include further tax benefits for the industry. Congress may move to further delay an ACA tax on insurance plans that has been suspended but was slated to go back into effect next year. If that happens, it could turbocharge insurer results already boosted by the corporate tax cut.

Telecom

By Drew FitzGerald and Ryan Knutson

Because most telecommunications carriers’ revenue comes from domestic operations, reducing the corporate rate to 21% from 35% could save them billions annually. The provision that allows companies to immediately write down the full value of their capital investments through 2022 also would lead to big savings in the near term.

AT&T threw its weight behind the tax push, saying that it would increase its capital spending by $1 billion in 2018 if the legislation passes.

Bonus depreciation, a tax benefit that allows businesses to write off the falling value of machinery and equipment upfront rather than over time, gave a windfall to telecom companies like AT&T and Verizon Communications Inc. when it was added to the tax code nearly a decade ago. This bill extends and expands that stimulus measure for the next five years, giving big capital spenders an extra break from an already slimmer corporate tax bill.

Network operators are among the biggest beneficiaries of bonus depreciation because of the amount of gear needed to keep their systems up-to-date. The depreciation write-off will hit as wireless companies ramp up spending on new hardware designed to support fifth-generation, or 5G, networks.

The tax bill released Friday boosts the amount of spending that companies can immediately write off to 100% from 50% for purchases made over the next five years. The percentage would decline after then. The benefit is supposed to expire after that. The bill’s overall 21% corporate tax rate, down from 35%, also will lop billions of dollars off telecom companies’ federal obligations.

AT&T Chief Executive Randall Stephenson earlier this year said he would rather see overall corporate taxes fall than get an extension to the depreciation write-off, arguing that the lower corporate rate would help most businesses.

The company is now expected to get most of both benefits. Taking out a big depreciation expense in one year, instead of in small amounts over time, frees up more cash for executives to invest at a return, helping the company in the long run.

AT&T said its 2016 income-tax bill totaled $6.48 billion, and its effective tax rate was 33%. Verizon set aside $7.38 billion for income taxes last year, and its effective rate was 35%.

Wells Fargo estimates the depreciation benefit would add about $1.6 billion and $1.2 billion, respectively, to free cash flow for AT&T and Verizon in 2019.

Autos

By Mike Spector

Auto makers are breathing a sigh of relief as the conference bill preserves an income-tax credit of up to $7,500 for electric cars. (The House bill had eliminated it).

Car companies are plowing billions of dollars into developing the battery-powered vehicles and view the credit as key to spurring consumers to buy the advanced technology, which typically boosts vehicle prices thousands of dollars above gasoline-powered cars and trucks. In addition, low gasoline prices currently make electric and plug-in hybrid vehicles tougher sells.

Auto makers and their Washington allies argued losing the credit would make it more difficult to meet stringent environmental regulations requiring them to sell electric cars, and broadly curb emissions and increase fuel economy.

“This credit supports innovation and job creation while helping drivers access advanced vehicle technology,” said Genevieve Cullen, president of the Electric Drive Transportation Association, a Washington group representing auto makers and other companies promoting battery-powered vehicles.

Refiners

By Christopher M. Matthews

The refining industry is poised to reap more than $150 billion in tax savings next year alone, according to some estimates, if the current 35% corporate tax rate drops to 21% as called for in the legislation.

Independent refiners have largely been unable to use other tax provisions to avoid paying the current 35% tax rate, unlike major oil companies like Exxon Mobil Corp. and Chevron Corp., which both produce and refine oil. That is because refiners can’t take advantage of offsets such as deductions for drilling costs and most don’t have overseas assets.

The tax bill would provide around a 12% tax cut to companies like Valero Energy Corp., Andeavor Corp., Marathon Petroleum Corp., and Phillips 66, according to an analysis by Barclays PLC. That is in contrast to a 2% tax cut for integrated companies like Exxon Mobil. The tax cut equates to 22% lift in earnings per share for the refining industry compared with a 3% boost for integrated companies, Barclays said.

Most of that money will go back to investors, say analysts and people familiar with the companies’ plans. Since 2012, U.S. refiners provided $53 billion in cash to shareholders in dividends and buybacks, more than half the cash they generated from operations. “Most of this will go back to investors,” said Barclays analyst Paul Cheng.

Pharmaceuticals

By Jonathan D. Rockoff

The tax overhaul paves the way for drug companies to bring back tens of billions of dollars in profits held overseas and remove or reduce taxes on those earnings going forward.

Drug companies also avoided some of the biggest threats posed by the legislation like the undoing of the research-and-development tax credit, which survived untouched.

U.S.-based drug companies like Amgen Inc., Gilead Sciences Inc. and Pfizer Inc. have kept billions of dollars in profits overseas to avoid losing a big chunk due to taxes.

Wall Street analysts expect the companies would bring back much of their overseas cash, and use it to buy rivals and buy back shares.

The repatriation could lead to some big acquisitions in the drug industry, as well as make targets out of small and midsize drug companies with products that could fit into the portfolios of big firms looking for ways to spend their cash.

About a third of the 30 U.S. companies with the most cash abroad come from the drug industry, according to Credit Suisse. That is because drug companies both do a lot of business overseas and have shifted intellectual property there to take advantage of lower tax rates.

The tax plan would remove many of the incentives to employ such tax-lowering tactics, exposing more company income to U.S. taxes, said Robert Willens, a Columbia University Business School professor who runs his own tax-and-accounting services firm.

The legislation’s reduction in the corporate tax rate, to 21% from 35% currently, might not cut tax bills as much as expected. Through tax planning, many drug companies had effective tax rates that were in the low-20-percent range already, experts say.

Companies also would have to change how they account for research-and-development expenditures, Mr. Willens says. But the final legislation preserved the R&D tax credit, which many small and startup drug companies in particular count on.

Agriculture

By Jacob Bunge

Farmers dug in to preserve tax deductions for agricultural cooperatives, the grower-owned organizations that market farmers’ crops and supply fertilizer and pesticides.

The House and Senate tax bills passed in recent weeks both eliminated the Domestic Production Activities Deduction, also known as Section 199, which has allowed farmers to reduce their income by deducting some co-op costs. Agricultural groups have said the deduction amounts to about $2 billion annually.

The final tax bill doesn’t include Section 199—but it does include a new 20% deduction on cooperative payments to farmer members, as well as a similar deduction for cooperatives themselves. “While we continue to analyze the exact impact for both the co-op and our members, we believe that the new provisions will provide a benefit that is comparable to that received under Section 199,” said Chris Policinski, chief executive of Land O’Lakes Inc., a Minnesota-based agricultural cooperative that generated $13 billion in sales last year.

Farm groups generally backed other aspects of the tax legislation, which they said expanded some exemptions from the federal estate tax and improved depreciation for agricultural machinery. But the GOP tax bill eliminates the health-insurance mandate under the Affordable Care Act, a provision in the Senate tax bill that had some farmers worried they could face higher premiums.

Manufacturers

By Andrew Tangel and Annie Gasparro

Tax legislation advancing in Congress likely will make the U.S. more attractive as a base for manufacturing, tax experts said.

International provisions aimed at repatriating and taxing overseas profits will generally favor domestic manufacturers that export from the U.S. or companies with production in the country, Mr. Green said. But the tax bill could have mixed impacts for U.S.-based companies with overseas operations, depending on each company’s circumstances, he added.

U.S. manufacturers are likely to benefit from the ability to immediately write off the costs of equipment purchases, tax experts said. That could mean more sales for equipment makers and spur manufacturers to invest in new factory machines.

The final bill exempts agricultural-equipment dealers, along with automobile and other dealers, from new limits on interest they pay for inventory, said Kip Eideberg, a lobbyist for the Association of Equipment Manufacturers.

Current law allows dealers to deduct all of the interest they pay for what is known as floor plan financing. The final bill, however, excludes construction-equipment dealers from the exception, making them subject to the new limits on interest deductions so they can instead take advantage of another provision they favor: accelerated write-offs of equipment purchases.

Within the food manufacturing sector, companies with international brands such as Oreo cookie maker Mondelez International Inc. and M&M’s owner Mars Inc. will save money when they repatriate overseas earnings.

U.S. food companies also have been investing in their businesses to reformulate recipes and develop new, trendier brands. As a result, they will benefit from using the research-and-development tax credits since the corporate alternative minimum tax was eliminated from the bill. Under current law, they can’t claim R&D exemptions when paying the alternative minimum tax. However, experts say that breaking out R&D costs for tax purposes and amortizing those expenses over several years would be complicated and costly for food companies, which typically don’t calculate their expenses that way.

“That’s one of the hidden traps that are going to affect food manufacturing,” said Bill Marx, a tax partner at Grant Thornton LLP that specializes in food and beverage companies.

Oil & Gas

By Bradley Olson

Corporate-tax cuts will be a boon to oil-and-gas producers in a variety of ways, but the rate reduction isn’t expected to be as meaningful for big companies such as Exxon Mobil Corp. or shale drillers, as it will be for refiners.

Like other multinational corporations, oil giants such as Exxon and Chevron Corp. will be able to bring profits made abroad back into the U.S. at a lower tax rate, according to Niloufar Molavi, the global oil and gas leader for PricewaterhouseCoopers.

Thatis one of a number of changes with the legislation that signal a transition to “territorial taxation,” where large U.S. companies with global operations wouldn’t necessarily have to pay domestic tax on activity abroad for which they already paid tax to another country, she said.

The bill also has provisions that continue to provide breaks to energy partnerships whose earnings are taxed once they are paid out to shareholders. Often called master-limited partnerships, or MLPs, many companies within that corporate structure operate pipeline assets around the country.

Hospitals

By Melanie Evans

The Republicans’ tax overhaul is a mixed bag for the hospital industry, though one major sector dodged a bullet in the final conference bill.

The nation’s nonprofit hospitals—which account for about 60% of the sector—will maintain access to tax-exempt bond markets under Republicans’ compromise tax bill released Friday. House Republicans had proposed ending a tax exemption for so-called private-activity bonds, which nonprofit hospitals use to finance capital projects. The compromise released Friday didn’t include that provision.

Hospitals went to market for $37 billion in tax-exempt bonds in 2016, according to Thomson Reuters. The risk hospitals could be shut out sent borrowers scrambling to raise funds in recent weeks.

Rick Pollack, president and chief executive officer of the American Hospital Association, called the borrowing “a vital source of low-cost capital financing.”

But the legislation would repeal the Affordable Care Act mandate that most people get health insurance, which hospital officials have said would increase the number of uninsured patients seeking medical care.

Republicans’ proposal to lower the corporate tax rate to 21% from 35% would benefit major hospital companies including HCA Healthcare Inc.

But due to another provision in the proposed overhaul, Tenet Healthcare Corp., Quorum Health Corp. and Community Health Systems Inc. wouldn’t fare as well under the GOP tax plan as would rivals with less leverage, said RBC Capital Markets Analyst Frank Morgan.

The compromise tax plan introduces a new limit on interest-expense deductions. Companies would be able to deduct interest expense only up to the equivalent of 30% of earnings before interest, taxes, depreciation and amortization. After four years, the bill would switch to a more conservative calculation of earnings, which would further reduce interest-expense deductions.

Tenet, in a statement about its 2018 outlook, said it expected the limits on interest expense deductibility to lower its net income and earnings per share from its outlook figures. Officials at Quorum and Community Health didn’t respond to a request for comment.

Airports and Airlines

By Susan Carey

The tax bill will preserve “private activity bonds,” tax-exempt financing that local governments that own airports sell to fund new or rebuilt terminals, parking garages and other infrastructure. A provision of the House tax bill would have ended the bonds, which also help raise money for ports, hospitals and universities.

Airports estimate they have $100 billion in infrastructure needs over the next five years, and 60% of those projects were expected to be financed through these types of bonds. Without the tax break, they would have to sell costlier taxable bonds. Both airlines and airports reacted positively.

Airlines are happy that the corporate tax rate will fall to 21% next year from the current 35%, according to their leading trade association, Airlines for America. The group said the overall tax package will incentivize further airline investment in equipment and jobs; the U.S. passenger airline capital expenditures totaled $17.5 billion in 2016. The corporate rate reduction more than makes up for limits on business interest deductions, changes in deductible expensing and the elimination of net operating loss carrybacks, the group said.

Delta Air Lines Inc., for one, said it expects the drop in the corporate rate to save it $800 million a year and push up its expected earnings by $1 per share to $6.35 from $5.35 or so.

Aerospace and Defense

By Doug Cameron

Effective tax rates are set to drop to an average of 20%, which far outweighs the loss of credits for research spending, say Sanford C. Bernstein & Co. analysts. The downside is a rising federal budget deficit could crimp military spending cuts in the early 2020s if the broader reforms don’t generate increased revenue through higher economic growth.

The final push for new tax legislation has left defense companies wrestling with temporary budgets that could stretch into January or February. These freeze spending at last year’s level and prevent the launch of new projects, prompting companies and military chiefs to seek exemptions for some big programs.

Company executives also say they may prepay some pension obligations to secure tax benefits of writing off that cost at the current 35% rate.

Restaurants

By Julie Jargon

The tax overhaul is largely favorable for restaurant companies and their shareholders, according to several analysts.

But multinational chains such as McDonald’s Corp., Restaurant Brands International Inc. and Yum Brands Inc. that have a higher mix of U.S. debt to earnings could take an earnings hit due to limits on the tax deductibility of U.S. interest expenses, according to Credit Suisse analysts.

Based on the reduction of the corporate tax rate alone, analysts say fast-casual dining chains such as Shake Shack Inc. and Chipotle Mexican Grill Inc. would benefit the most because they currently pay the highest corporate tax rates.

Some restaurant companies are expected to reinvest savings from lower tax rates into their business to improve food quality and service and to remodel restaurants, Stifel analyst Chris O’Cull says. Others, he said, are likely to reduce debt, buy back shares and increase dividends.

Most might plan to allow the savings to benefit the bottom line. Baird surveyed executives at 24 restaurant chains comprising about $12 billion worth of revenue and found that 57% of respondents said they would simply allow the tax savings to boost earnings.

Grocers

By Heather Haddon

Larger grocers will immediately benefit from the reduction in the corporate tax rate, and down the road should also see savings from the ability to claim additional depreciation on property, computer software and other qualified improvements, accountants said.

The tax bill also maintains the Work Opportunity Tax Credit, a benefit for service-oriented businesses.

But independent food retailers continue to fall short under the revised bill. Many of them will have to pay the higher corporate rate maintained for pass-through and S-corporations.

“The concern is that the bill is designed for the bigger retailers,” said John Ross, chief executive of the Independent Grocers Alliance Inc., a U.S.-based company providing branding and support to family-owned supermarkets.

Pass-through companies are now discussing the expensive proposition of becoming C-corporations, said Randolph Smith, tax partner and national managing partner of Grant Thornton LLP’s Transportation, Logistics, Warehousing, and Distribution practice.

“It’s the first time in my career that we have had companies considering converting,” Mr. Smith said. The gap between the pass-through rate of around 30% and the corporate one at 21% is “a huge difference obviously,” he said.

Among IGA members Mr. Ross has spoken to about the bill, all of them are considering converting to a C-corporation, he said.

Cruise Lines

By Costas Paris

Cruise operators ultimately weren’t included in the tax bill, after Sen. Dan Sullivan (R., Alaska) opposed a Senate proposal that would have increased rates for Carnival Corp., Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings Ltd. by 2%, or about $100 million a year through 2027.

The proposal, also opposed by Cruise Lines International Association, the industry’s trade body, would have made cruise operators owe tax for the time they sail in U.S. waters. Alaska is one of the most popular cruise-ship destinations in the U.S., accounting for 20% of passenger and crew visits in the U.S. and generating an annual $524 million in onshore spending, according to the association.

In direct expenditures by the cruise industry, Alaska received $1.07 billion and another $678 million in tourism-related business, such as tour operators, airlines and hotels in 2016.

The three cruise lines are all based in Miami but incorporated, respectively, in Panama, Liberia and Bermuda. The Senate proposal would have created a new category of taxable income for foreign corporations with cruises originating in the U.S.

Alcohol

By Saabira Chaudhuri

Amid the Republican push for a tax overhaul, executives and lobbyists from the beer, wine and spirits sectors dropped their usual squabbling and joined forces. They are now celebrating the possibility of what they are calling their first federal tax reduction in roughly 150 years.

The bill includes a two-year provision that would cut federal excise tax on alcohol makers.

For instance, it would set a reduced excise tax rate of $2.70 per “proof gallon” that a booze maker must pay on the first 100,000 gallons of distilled spirits produced or imported annually. The current rate is $13.50 per proof gallon, a measurement of volume that takes into consideration alcohol content. For the next 22 million or so gallons, the rate would rise to $13.34, after which it would keep the current rate.

Different excise rate reductions and credits also would apply to wine and beer makers. The biggest winners are smaller brewers, vintner or distillers because of their relatively low volumes.

Robert Cassell, co-founder of Pennsylvania based New Liberty Distilling, estimates the tax cuts would give him an extra $50,000 to $80,000 a year to hire people and buy more equipment at his two distilleries in County Mayo, Ireland and Kensington, Pa. “This is like found money,” he said.

If passed, the bill would be the first cut to federal taxes for alcohol makers since the Civil War, according to Frank Coleman, public affairs head for the Distilled Spirits Council, which has led lobbying efforts for spirits makers in the U.S.

Industry watchdog Alcohol Justice urged Americans to lobby Congress not to pass the alcohol tax cuts, saying economic harm from excessive alcohol consumption costs $249 billion annually, including 88,000 deaths, alcohol-related car crashes, violence, chronic illness and lost productivity.

Renewables

By Erin Ailworth

The tax bill released Friday maintains federal credits for wind and solar energy projects. A previous House proposal would have weakened them.

“This is a great victory for the solar industry and its 260,000 American workers,” said Abigail Ross Hopper, chief executive of the Solar Energy Industries Association. The trade group pushed to protect the existing solar investment tax credit, which already was scheduled to be gradually reduced to 22% in 2021 from 30% today.

Instead of retroactively changing how businesses qualify for wind tax credits as previously proposed, the current bill keeps intact the terms of a previous agreement to phase out wind credits through 2019.

The bill also alters Senate provisions that some had warned could cripple the tax-credit-fueled financing on which many renewable energy projects rely. That threat has been reduced by this bill, which would allow developers and financiers to use as much as 80% of the tax credits to which they are currently entitled unfettered.

The American Council on Renewable Energy remains concerned. “Even as we recognize that important progress was made in the effort to repair those provisions, we also note that the repair does not cover the full duration of the wind production tax credit,” said Gregory Wetstone, chief executive of the council.

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