The Obama Administration has released its Framework for Business Tax Reform, a broad-brush look at where it would want to take business taxes. The Framework would eliminate a number of targeted tax benefits and would tighten the rules relating to taxation of foreign operations, with the goal of using the revenue produced to reduce the overall corporate tax rate. The proposal would not be a tax cut but would raise revenue. However, there would be winners and losers. On balance, the proposal could be favorable to many retailers.
The current Federal corporate tax rate is 35%. The Framework notes that, because of various special tax incentives, the average effective corporate rate is actually only 26%. However, for wholesale and retail trade, the effective rate is 31%, because retailers benefit from few of the special tax incentives. The Framework would replace the current 35% rate with a 28% rate. This reduction should provide retailers with a significant tax benefit.
Retailers would not escape unscathed from the Framework’s elimination of targeted tax benefits. One provision that would be terminated is LIFO (last-in, first-out) inventory, used by many retailers, which in an inflationary economy has the effect of increasing the cost of goods sold and thus reducing gross income subject to tax. In addition, retailers with substantial international operations would be subject to higher taxes on income earned abroad. Also, the proposal would reduce the deductibility of interest paid on corporate indebtedness.
Small retailers might benefit from proposals allowing increased expensing of investments and increased use of the cash method of accounting for tax purposes.
Each retailer would need to evaluate whether, based on its particular facts, it comes out ahead under the Framework (though the substantial rate reduction provides a good head start). Much more detail from the Administration will be needed to make this analysis.
Given the current political climate, it is highly doubtful that the proposal will be enacted soon or as proposed. Much of the cost of the rate reduction would be paid for by increased taxes on the oil and gas, insurance, and hedge fund industries as well as companies with overseas operations, which can be expected to vigorously oppose those parts of the Framework. Nevertheless, there is an emerging consensus that corporate tax reform is needed, so release of the Framework is an interesting step in the process.
The Framework is available at http://www.treasury.gov/resource-center/tax-policy/Documents/The-Presidents-Framework-for-Business-Tax-Reform-02-22-2012.pdf.
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