Taxing Reform

Meaningful federal tax reforms remain fleeting in a year dominated by Twitter, political turbulence, and uncertainties for business and finance. By Lisa Wilder | Winter 2017

“True tax reform is not just about how a business computes taxable income. Tax reform is the opportunity to look at all our business processes to see if there’s an opportunity to optimize what we do to maximize our return on investment.”

Attention always turns to tax policy and how it might change during the first year of any new administration in Washington, D.C. By most accounts, year 2017 has been the same, albeit things have turned out to be a little different than expected.

Despite near-perfect legislative conditions — majority party, pro-tax reform rule in both the White House and Congress — the first real attempts at tax overhaul in 30 years have been a slugfest right up to the year-end Congressional recess.

What’s the lesson? Any time federal or state legislators take an ambitious run at the tax code — tax professionals and finance executives need to do everything possible to stay flexible, stay focused, and stay fixated on the best options for their businesses and their clients — all while staying calm.

For Renato Zanichelli, national managing partner of Grant Thornton’s Tax Reporting & Advisory Services practice, that’s meant “urging all of my clients to create models for potential outcomes. Step one is to understand how tax reform is going to impact them. Step two is to look for ways to position them for future success.”

And once a deal in D.C. is finally done? Be ready for the sprint. “Many clients are looking at what they should be doing now to prepare for financial reporting requirements — if and when tax reform passes,” Zanichelli says. “They realize there will be a lot of work to do in a short period of time.”

While top administration officials had predicted tax reform by the end of this rather tumultuous year, by the fall, public board members seemed less confident.

The 2017 BDO Board Survey, released in September, found that 78 percent of public company directors anticipated that tax reform will be achieved during President Donald Trump's current four-year term, but just 22 percent said they believed it would happen by the end of this year. Another 22 percent said they didn’t think tax reform would happen at all during Trump’s term.

However, by press time, a budget deal appeared imminent, setting the stage for some form of tax reform by the end of 2017.

So how do internal and external CPA professionals navigate such uncertainties for the businesses and clients they serve? It seems their advisory skill is less about prognosticating and more about listening lately — listening very closely.

Daniel Rahill, CPA, CGMA, a tax partner with BDO USA, LLP in Chicago, figures he’s given “over a dozen” tax reform presentations since the election. At the start, he reflects that “most of us believed that significant changes were imminent with a Republican Congress and president all moving in the same general direction of rate reduction and a territorial tax system.”

But as the final quarter began, things had clearly changed, at least from Rahill’s point of view.

“The current mood can be summed up in three words: interested, inquisitive, and cautiously optimistic,” he reckons. “Clients are not ‘concerned’ about this as much as they now are curious bystanders watching to see if a fractured political party can pull itself together enough to propose tax legislation to make the U.S. more competitive globally.”

Mark Wolfgram, CPA, senior tax compliance manager at Bel Brands USA says chalk talks about various tax scenarios throughout this year have proven useful for the leading Chicago cheese company, but ultimately, rapidly changing domestic events and competing priorities out of Washington have made it tough to cement a clear prediction on how tax reform might look.

“At Bel, we’ve used the information coming out of D.C. to do some initial planning,” he explains. For example, the company began to “model out” how the proposed Border Adjustment Tax (BAT) would impact its business. “We involved the various players — supply chain, finance, tax, etc. — and established a flow of communication around the model. Now that the BAT seems to have been shelved, the modeling for that piece is on hold.”

Still, Wolfgram says it was an exercise that produced real dividends. “Having open lines of communication is important as true tax reform is not just about how a business computes taxable income. Tax reform is the opportunity to look at all our business processes to see if there’s an opportunity to optimize what we do to maximize our return on investment.”

The events of the past year seem to have increased the value of testing scenarios and optimizing one’s analytical skills. Wolfgram recalls the meeting he had with Bel’s CFO and one of its board members on November 9, 2016, the day after the election.

“I began to outline to them that tax reform and repeal of the Affordable Care Act were now going to happen within 12 months. So far that has not happened … and the more days which pass make these two things less likely to happen.” Speaking in late September, Wolfgram said he believed “real tax ‘reform’ is going to be replaced by a simple tax ‘cut,’ and real meaningful reforms to the U.S. tax system and the Affordable Care Act are not likely until 2019 at the earliest.”

Rahill concurs, adding that currently there are not a lot of “viable ways to pay for tax reform, which would mean an increase to an already bloated deficit. And what does tax reform really mean today?” he asks. “When I think of tax reform, I think of the early 1980s tax legislation, when we had significant tax acts in 1981, 1982, 1984, and 1986. The Tax Reform Act of 1986 was so significant in changing the tax law that Congress renamed the Internal Revenue Code from the Code of 1954 to the Code of 1986. That was significant tax reform,” he explains. “If any tax legislation is enacted, it may simplify the current tax regime and lower tax rates, but it will not be significant tax reform.”

Given a big political picture that’s riddled with speculation and uncertainty, the role of the most trusted business advisors is being put to test. Advising clients is anything but easy during times like these.

Given what’s unfolded during the first three quarters of 2017, Rahill says there’s little proactive planning an advisor can recommend to a client.

“That said, in situations where a client can defer a transaction with potentially affected tax implications to a later date, when tax reform is more predictable, we would recommend that they take a wait-and-see position assuming no negative implications to waiting,” he says. “Examples would include estate planning until we know if the estate tax will be repealed; intellectual property migration to a lower taxed jurisdiction (outside the country) until we see what the U.S. tax rates will be in the future; or a purchase of a home until we see how itemized deductions, including mortgage interest and property taxes, would be impacted by any proposed legislation.”

Alternatively, you can take Wolfgram’s approach: “It’s business as usual. It has to be. Certainly, our company would like to see tax reform happen, allowing us to pay less tax and use that money to invest in the business,” he says. “But we realize there’s uncertainty surrounding the process and that we should not count on tax savings to make investments at this point. Now we’re viewing potential tax reform benefits to be a windfall instead of relying on them to make the numbers work.”

In the meantime, as we all eagerly await the outcome of this tax reform showdown, accounting and finance professionals should simply do their best to stay informed.

“Reading and listening to insight from all sides of the political spectrum is the best way for me to stay up-to-date. I read and listen to everything I can get my hands on. I sign up for newsletters from the largest accounting firms in the country and I listen to all their webinars. I follow tax policy experts on Twitter and read their think pieces. I listen to podcasts on tax policy, and I speak with my colleagues on the Illinois CPA Society’s Business Taxation Committee during each meeting on the latest updates and prognostications,” Wolfgram says. “It’s a lot of work, but when you’re a tax nerd like me, it’s fascinating to watch how this unfolds.”