TCJA: Has the Chance Paid Off?
Two years in with the new tax law, there’s still much uncertainty about its benefits.
In December 2017, the Tax Cuts and Jobs Act
(TCJA) was enacted as part of a domestic growth
strategy designed to fuel job growth, wages, and
capital spending. The Act lowered the statutory
corporate income tax rate from 38.9 percent to 25.7
percent, bringing the U.S. corporate income tax rate
more in line with the Organization for Economic
Co-operation and Development (OECD) average of
“The Congressional Budget Office (CBO) projected
that GDP would grow about 0.3 percentage points
faster in 2018 and 2019 due to the TCJA,” explains
Kyle Pomerleau, chief economist at the Tax
Foundation, an independent tax policy non-profit
based out of Washington, D.C.
U.S. GDP did grow in 2018, at a rate of 2.9 percent—
about 0.1 percentage points shy of the CBO’s
projection. Some analysts believe that lowering the
tax rate was not enough, as there are still 22 OECD
countries that have statutory corporate income tax
rates below that of the United States. Further, due to
escalating geopolitical uncertainties over the past
two years, it remains challenging to identify the
actual impact of the TCJA.
“It’s hard to tell if the TCJA was underperforming, or if the Trump
administration’s tariff policies had a negative impact,” Pomerleau
says. “Investment did accelerate in 2018 but has since gone back
down in 2019. This could have been in response to the TCJA, but
it is probably too early to tell.”
Jeff Glenzer is the executive vice president of the Association for
Financial Professionals (AFP). He acknowledges that increased risk
associated with today’s global uncertainties makes it even more
challenging to measure the true impact of the TCJA.
“Consider all the hostility in Washington, the ebb and flow of the
relationship with North Korea, the continuing escalation of tariffs,
and now China being flagged as a currency manipulator,” Glenzer
says. “Each one of these factors creates a new source of real or
perceived risk for corporate decision makers.”
Corporate spending, one of the elements the TCJA was designed
to spur, is depressed by increased risk and an uncertain
environment. A March 2019 AFP liquidity survey indicates that
companies may still be hesitant to reap the benefits of the TCJA.
In the 12 months to March 2019, about half of the 496 finance and
treasury professionals the AFP surveyed said the size of their cash
hoards had not changed much, either domestically or overseas.
Fifty-seven percent of survey respondents had not made changes
in their spending or allocation patterns, and those that are
spending, aren’t spending it on what they were expected to.
“What’s most troubling to me, is that even when companies are
drawing down corporate liquidity, the way they’re deploying that
corporate cash is not the most beneficial for either the company or
the economy,” Glenzer says.
Instead of investing in new products or in building new factories,
companies are taking a more cautious approach to their spending
strategy by focusing on non-infrastructure investments such as share
buybacks and debt reductions.
“If you take your cash and move it into a longer term financial
instrument, those decisions are easier to undo as compared to
more permanent decisions such as investing in a factory or an
acquisition,” Glenzer says.
Glenzer’s bigger concern though, is that due to economic and
geopolitical uncertainty, companies are more likely to keep sitting
on large pools of corporate cash. “When the market’s psyche
changes to where it’s perceived as safe to start drawing down
corporate cash, there’s going to be an awful lot of corporate cash
chasing a limited number of really strong opportunities. Companies
are going to have to be very careful about overpaying for target
assets,” Glenzer explains.
The TCJA was also expected to have a positive impact on
repatriation of corporate profits through the effective elimination of
taxes on repatriated earnings of U.S. multinationals from their
foreign affiliates. Indeed, U.S. corporations did repatriate funds in
record numbers in 2018, bringing back almost $777 billion, though
this was a far lower number than the anticipated $4 trillion expected
by President Donald Trump.
According to the AFP survey, only 16 percent of respondent
companies repatriated funds. Of the companies that did shift funds
domestically, over half moved less than 25 percent of their offshore
earnings. “The TCJA probably slowed the growth of the percentage
of company funds that are held offshore,” Glenzer surmises.
Glenzer also points out that tax strategy is not the only reason
companies keep funds offshore. “There are a lot of companies who
have said that they didn’t care about taxes—they cared about the
opportunity to use those funds to invest overseas. The TCJA did
not change the economic potential of various markets where
companies were investing those funds.”
For small businesses, the 20 percent pass-through deduction may
have had more of an impact than the tax cut. Under the TCJA, pass-through
entities such as partnerships, limited liability companies,
S corporations, and sole proprietorships can deduct up to 20
percent of the first $315,000 of qualified business income, or QBI.
“This pass-through deduction has freed up cash for hiring and
expansion,” says Tom Wheelwright, CEO of WealthAbility, a tax
strategy service provider based in Tempe, Ariz.
As a result of increased liquidity provided by the TCJA, Wheelwright
has invested in growing his business this past year.
“We just purchased a building for the office and are building a
second property for the business. We are also hiring for new
positions versus just replacing old positions,” Wheelwright says.
Wheelwright believes that some companies may be slower to
leverage the TCJA because of political uncertainty. “The hesitation
is primarily because of legislators threatening to undo the
legislation. This creates uncertainty regarding the longevity of the
corporate tax rates and makes corporations unsure they can count
on the lower rates in the long run,” Wheelwright explains.
However, not all small businesses have similarly benefited from
“As a business owner, the TCJA has negatively impacted me,” says
Brian Cairns, CEO of ProStrategix Consulting, a New York-based
small business management consulting agency. “We, unfortunately,
fall under the ‘Professional Service’ section of the Act. Our benefit
is capped at $150,000, which is an extremely low number for a
successful small business. We actually paid more in taxes than
prior—first because of the cap and second because of the
elimination of the state and local tax write-off.”
Cairns notes that overall, the impact of the TCJA on small
businesses has ranged from neutral to negative: “When you
balance the loss of the tax write-offs, the increased costs of
compliance, and the caps, there was little left for reinvestment. I
would argue that the TCJA has done very little, if anything, to
improve the economic conditions of small businesses in my area.”
Beth Logan, an enrolled agent with Kozlog Tax Advisers in
Chelmsford, Mass., points out that the TCJA did not lower the
corporate tax rate. Rather, it flattened the rate table.
Prior to the TCJA, the tax rates for C corporations, which are
separate entities filing their own taxes as opposed to entities whose taxes pass through to the owners, varied from 15 percent to 35
percent. The TCJA flattened the rate to 21 percent.
“For small C corporations, the tax rate went up from 15 percent to
21 percent. Congress, while claiming to want to help small
businesses, actually damaged small C corporations with less than
about $150,000 of profit,” Logan says.
Logan also says that another interesting result of the TCJA is the
different treatment of partnerships and S corporations. S corporation
owners are required to take a salary reported on a W-2, and the
resulting profit is not generally subject to Social Security
contributions. Conversely, partnership owners are not allowed to
take a salary reported on a W-2 and must claim all profits as income
subject to Social Security contributions.
“The catch is that the Qualified Business Income Deduction (QBID)
is based on profits,” Logan explains. “A partnership gets all their
income included as QBI, and therefore gets a higher deduction.
The S corporation owner only claims the profit as QBI and therefore
gets a much lower deduction, all else being equal.”
For salaries below the Social Security contribution threshold, the
partnership pays more taxes due to the Social Security contributions.
For salaries above that threshold, the S corporation generally
pays more taxes.
Logan says this has generated a great deal of discussion about
entity selection. By her observation, some companies are changing
to partnerships from S corporations and others from C corporations
to S corporations.
“The reasoning behind the QBID was to allow pass-through entities
to get a tax savings like C corporations without changing entities,”
Logan explains. “It hasn’t worked.”
Additionally, the QBID is based on profit minus other business-related
deductions, including retirement plans like SEP, SIMPLE, and 401(k). It
is not after IRA contributions because those are not tied to the
business. Because of this, Logan suggests that small business owners
consider contributing to a traditional IRA and claiming the higher QBID
rather than using their business’ established retirement plan.
Pomerleau’s stance at the Tax Foundation is that the impact of the
TCJA will continue to roll out over the next decade. He believes that
the lower tax rate will reduce corporations’ incentives to shift profits
overseas to reduce domestic tax liability. He also expects that
companies will start planning around the new international tax regime.
“Specifically, companies may shift their intellectual property into the
United States to benefit from the new FDII (foreign-derived
intangible income) provision and to avoid the new GILTI (global
intangible low-taxed income) provision,” Pomerleau says.
And finally, Pomerleau believes that companies—at least in the short
run—will accelerate their investment decisions in response to the
temporary 100 percent bonus depreciation provisions in the law.
While the impact of the TCJA may not yet be fully realized, Glenzer
says it has the potential to shift business strategy away from the
economics of taxes, enabling companies to be more focused on
the economics of their businesses.