Corporate Tax Reform Impacts Large and Small Businesses Alike
By Cameron Kish
Cameron Kish is an undergraduate student majoring in Accounting in the Eli Broad School of Business at Michigan State University
In December of 2017, President Trump rolled out legislation that reduced the corporate tax rate from 35% to 21%. According to the Tax Foundation, with one change, the United States went from having the largest corporate income tax rate, to below the international average (weighted by GDP) of 26.5%.
This change of rate will likely have significant implications on large companies, small businesses, and the United States economy as a whole.
One of the biggest expectations from this change is the fact that companies would bring cash from overseas back to the United States. The company with the largest offshore cash holdings is Apple with over $252 billion.
Although it has been great for Apple to accumulate money over time, the problem is that they aren’t able to do anything with it. It is like having the largest bank account in the world but having no ATMs to withdraw from. Now since the change in the corporate tax rate, Apple finally has an incentive to bring back cash to the United States.
So what has been the result? Apple has since announced the repatriation of its cash from overseas. It has promised to invest at least $30 billion in the United States. With this investment comes an expected 20,000 new jobs through the construction of a new domestic campus and other spending.
Under the new tax law though, “companies that make a one-time repatriation of cash will be taxed at a rate of 15.5 percent on cash holdings and 8 percent on non-liquid assets” ( Wakabayashi, Jan. 2018). This will result in a tax payment of $38 billion to the United States through this repatriation.
Although this seems large, Apple managed to save $43 billion when you compare it to the old tax laws. Apple has also been preparing for the day when it will pay taxes through repatriation and has already set aside funds for this payment.
The next largest company with cash held overseas is Microsoft. They too held over a hundred billion in cash overseas. With the new tax legislation, whether the cash is repatriated or not, companies are still required to pay the rate of 15.5% or 8%.
For Microsoft, this resulted in a $13.8 billion tax bill (Day, Feb. 2018). Unlike Apple, Microsoft has not announced any future plans now that it has access to its international funds. Trump’s plan was to have multinational companies like Microsoft repatriate their cash from overseas, but as of now, no decisions have been made known to the public of their plans.
How might this corporate tax rate impact small businesses? Another provision of the tax bill says that all pass-through business receive a 20% deduction.
What exactly is a pass-through business? It is simply a company that does not pay corporate income tax. These types of companies would include sole proprietorships, partnerships, and S-corporations. According to twocents.lifehacker.com, these types of companies would account for nearly 95% of all businesses in the United States ( D'Angelo, Dec. 2017).
This lower taxable income for small business is yet another way that companies will save money, and hopefully reinvest it elsewhere.
Proponents say that this new legislation would give the United States a new competitive advantage against other countries like Germany. Before, many manufacturing jobs would go to Germany simply because of the fact that their corporate tax rate was lower than ours.
Granted, Germany’s rate of 15% is still lower than the United States’, the gap is much smaller now. Companies will start to reconsider where their manufacturing operations will be held now that the opportunity cost of keeping jobs local may be better.
With multinational firms repatriating billions of dollars, the United States will begin to see much more investment at home than abroad. Smaller companies will also receive a tax break and will in turn use the savings to invest back into their own company.
Our new place on the corporate tax list is now making the United States seem like the competitive advantage it never was before. The combination of these benefits will hopefully lead to a strengthened United States economy that will make waves of change not only in our country but around the world.
D'Angelo, Matt. “How Will the New Tax Law Impact Small Business?” Business News Daily, 20 Dec. 2017, www.businessnewsdaily.com/10357-small-business-tax-reform-changes.html.
Day, Matt. “Microsoft's Benefit from Long-Term Tax Bet? $27 Billion.” The Seattle Times, The Seattle Times Company, 2 Feb. 2018, www.seattletimes.com/business/microsoft/microsofts-benefit-from-long-term-tax-bet-27-billion/.
Francis, Theo, et al. “The Tax Law, Just One Month Old, Is Roaring Through U.S. Companies.” The Wall Street Journal, Dow Jones & Company, 26 Jan. 2018, www.wsj.com/articles/the-tax-law-just-one-month-old-is-roaring-through-u-s-companies-1516899466.
Pomerleau, Kyle. “US Corporate Income Tax More Now More Competitive.” Tax Foundation, 12 Feb. 2018, taxfoundation.org/us-corporate-income-tax-more-competitive/.
Wakabayashi, Daisuke, and Brian X. Chen. “Apple, Capitalizing on New Tax Law, Plans to Bring Billions in Cash Back to U.S.” The New York Times, The New York Times, 17 Jan. 2018, www.nytimes.com/2018/01/17/technology/apple-tax-bill-repatriate-cash.html.
Webb, Alex, and Mark Gurman. “Apple, Returning Overseas Cash, to Pay $38 Billion Tax Bill.” Bloomberg.com, Bloomberg, 17 Jan. 2018, www.bloomberg.com/news/articles/2018-01-17/apple-expects-38-billion-tax-bill-on-overseas-repatriated-cash.