Managing Changes in Tax Rates

To close out our series, Top Middle Market CFO Challenges for 2017, we see a key concern for CFOs this year is managing financial strategies in light of the potential changes in tax laws. There will certainly be new changes to tax regulations in the coming years. This is welcome news to the business leaders surveyed by CNBC. Of this group, 73.9 percent of U.S.-based CFOs agree that Trump's principal focus should be corporate tax reform. In response, the new Congress and President have made tax reform a key element of their policy agenda. How these changes impact your business and how you capitalize on them will help drive your success in coming years.

Potential Changes Ahead

There are discussions underway to reduce the top corporate tax rate from 35 percent to as low as 15 percent, with other rates also being considered. Income associated with the 2016 tax year will be taxed at 35 percent, while income taxed in 2017 and later could possibly be taxed at lower rates. As a result, accelerating deductions into 2016 and deferring income should be highly considered as a tax planning strategy.

CFOs need to be aware of the impact the changes in the corporate tax rate may have on their financial statements, and not just on their tax returns. Generally Accepted Accounting Principles (GAAP) requires that companies “revalue” their deferred tax assets and liabilities in the period wherein tax legislation becomes law. Those changes to deferred taxes are to be recorded in the income statement. Therefore, a company in an overall deferred tax asset position will reduce net income after taxes as they will be lowering the asset on the balance sheet. This can have a material impact on a company’s earnings per share and therefore CFOs need to take actions to decrease their deferred tax asset or increase their deferred tax liability. 

Here are some key tax planning strategies for achieving these changes:

Many of these changes can be made on an extended tax return for the 2016 tax year.

Cost Segregation Study Reveals Savings

In response to these changes, a cost segregation study is an effective process that will significantly reduce your tax liability and improve cash flow, but most importantly, increase your deferred tax liability. The cost segregation study is an analysis that identifies and separates the costs of personal property assets (wall coverings, carpet, wiring) and land improvements (landscaping, parking lots) from real property assets (buildings). It identifies assets embedded in an organization’s construction or acquisition costs that can be depreciated for tax over five, seven or 15 years, rather than the standard 39 years. The costs associated with these assets are then reclassified so that you can accelerate depreciation of the property for tax purposes.

Why is accelerated depreciation important? The shorter depreciation periods for personal property and land improvement assets increase tax depreciation expense, which can potentially reduce your tax liability by hundreds of thousands of dollars and improve your cash flow. Performing a cost segregation study now can accelerate 2016 depreciation expense, and allow you to “catch up” for accelerated depreciation from prior years. While depreciation expense going forward will be reduced, it is likely that the tax rate will be reduced also, thereby creating a "permanent" tax savings.

HORNE is well-suited to provide these studies because the analysis process requires having a blend of skills—specifically, engineering expertise to analyze drawings and plans to segregate real property components from personal property, as well as having a clear understanding of the constantly changing federal, state and local tax credits and incentives.

To help you foresee what’s ahead in tax changes so you can capitalize on them, contact us. We look forward to helping you navigate the changing tax landscape.  

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