In this Capitol Report:
Trading Up For Better Profits: Why NAFTA Matters to YOU!
CACI is closely watching the most recent round of trade talks with Canada and Mexico – on your behalf! Yesterday, on January 23rd, President Trump’s trade team, led by U.S. Trade Representative Robert Lighthizer, began the sixth and potentially most important round of negotiations with our closest allies and economic partners to update NAFTA, the North American Free Trade Agreement.
The U.S. trade team is looking at three major priorities: for value to be added to U.S. products, to eliminate investor-state trade disputes being handled by a panel, and to update NAFTA to reflect e-commerce and trading which didn’t exist when NAFTA was first negotiated.
“This update is an important next step in ensuring that the American people continue to know what the Trump Administration is seeking to achieve in a renegotiated NAFTA. If we are able to achieve these objectives, we will both modernize and rebalance NAFTA to better serve the interests of our workers, farmers, ranchers and businesses.”
– U.S. Trade Ambassador Lighthizer
More specifically, trade negotiators will look for value to be added to North American products in the form of preferential treatment for certain products and product chains, particularly because U.S. manufacturers rely on complex supply chains for components and raw materials. Negotiators will also be looking for constructive ways to eliminate NAFTA’s investor-state dispute settlement mechanism, which relies on a panel of countries (not necessarily friendly to the U.S.) to mediate trade disputes. And lastly, for any final NAFTA agreement to recognize e-commerce as a “new” and rapidly growing industry, and looking to continue that growth by providing tax-free rates for e-commerce purchases.
After negotiations among the three nations are complete, U.S. trade delegates will present a renegotiated NAFTA to President Trump.
What follows next? A brief overview:
- A friendly “heads up” to educate lawmakers: The Trump Administration must submit a report to Congress re: any implied changes the new NAFTA agreement makes to U.S. law — exactly 180 legislative days before a final NAFTA deal may be signed by the President.
- Official notice to Congress: The Administration must notify Congress and simultaneously submit all details of the NAFTA agreement to the International Trade Committee (ITC) 90 days prior to the President signing the new NAFTA.
- Economic Analysis: The ITC must then do an economic analysis at least 105 days before Congress takes up NAFTA as legislation.
- Congress must approve the trade agreement: The Presidentially-approved NAFTA agreement must start in the House Ways and Means Committee for a vote and if passed, move to the House floor for a full assembly vote. The Senate then has 30 days to vote on the NAFTA bill approved by the House.
Despite this intense schedule, both Canada and Mexico must address any new NAFTA agreement through similar channels and there is always risk of political hurdles unrelated to the negotiated agreement. Regardless of those hurdles, Canada and Mexico are by far the most important export markets for Colorado manufacturers, with Canada making up 23% of the export market and Mexico 10%. Additionally, many of Colorado’s advanced manufacturers rely on complex global supply chains, where tariffs on Canadian and Mexican goods and services means smaller profit margins, higher prices, and reduced competitiveness for businesses here in Colorado.
As domestic and international policies evolve for NAFTA, CACI remains focused on fostering a pro-trade and pro-business environment to keep Colorado manufacturers competitive. For any questions about NAFTA, please contact CACI’s Director of Federal Policy, Leah Curtsinger, at [email protected] or call (303) 866-9641.
Impact on Manufacturers of The Tax Cuts and Jobs Act
Prepared by:
The Tax Cuts and Jobs Act (the Act) was signed by President Trump on December 22, 2017. The following are highlights that are pertinent to manufacturing and distribution companies and owners. As with past tax acts, there are likely to be “technical corrections” passed in future legislation. While technical corrections are often minor, occasionally the changes are material.
Business Tax Provisions
Benefits:
- Accounting for inventory and uniform capitalization rules (UNICAP/263A).Companies that have revenue of less than $25 million will be exempt from having to capitalize certain general and administrative costs to inventory for tax purposes (UNICAP rules).
- Research and experimentation tax credit is explicitly preserved.
- Cash method of accounting. The law allows companies with revenue less than $25 million to utilize the cash method of accounting for tax purposes.
- Increased depreciation expensing limits. Bonus depreciation and Section 179 depreciation are both increased under the new law.
100% bonus depreciation will be allowed for qualified property purchases after September 27, 2017 and before January 1, 2023. The bonus depreciation provisions will phase out between 2023 and 2026.
Section 179 limitations will be increased to $1 million on purchases of $2.5 million or less. The standard rules requiring active business income will remain.
- Partial exclusion of pass-through income. The Act will allow a 20% exclusion from tax of qualified income of pass-through entities, such as S-corporations, partnerships and sole-proprietorships. The exclusion will be generally limited to the lesser of 20% of qualified business income or 50% of W-2 wages paid by the entity.
- Reduction in C-Corporation tax rates. The tax rate for corporations under the Act will be 21% effective for taxable years beginning after December 31, 2017. The tax rate is currently 35%
- Elimination of C-Corporation AMT. The Act repeals the alternative minimum tax for C-Corporations.
Detriments:
- Repeal of the Domestic Production Activities Deduction/Section 199. Effective for tax years beginning after 2017, the law would repeal the 9% deduction for domestic production activities. Nearly every manufacturing and distribution company will be impacted by this repealed deduction.
- Limitation of business interest expense. An interest deduction limitation provision generally limits the deduction of interest expense to 30% of taxable income before interest expense. There is a “small business” exception as well as a transitional rule for certain expenses. The limitation applies to tax years beginning after December 31, 2017.
- Limitation on like-kind exchanges. Nonrecognition of gain for like-kind exchanges no longer applies to personal property or real property held primarily for sale.
- Net Operating Loss limitations. Net Operating Losses (NOL) are limited to 80% of taxable income and the Act eliminates most NOL carrybacks. New NOL’s are to be available for carryover indefinitely. The changes are effective for tax years ending after December 31, 2017.
- Entertainment Expense limitation. Entertainment expenses are further limited. Certain expenses that were 50% deductible will become 100% nondeductible. Other expenses that were fully deductible will be limited to a 50% deduction. The effective date is generally for expenses paid or incurred after December 31, 2017.
Individual Tax Provisions
- Tax rates for the individual income tax brackets will be reduced to a top rate of 37% compared to the current top rate of 39.6%. Since there are other changes to the tax base, especially with respect to deductions and alternative minimum tax, the degree to which the Act will result in a reduction of tax may vary greatly depending on the taxpayer. The change in rates generally apply as of January 1, 2018 and is slated to end after December 31, 2025.
- The standard deduction will be increased to $24,000 for joint filers and $12,000 for single filers beginning as of January 1, 2018 and ending after December 31, 2025.
- Personal exemptions are not allowed for tax years beginning after December 31, 2017 and before January 1, 2026.
- The home mortgage interest deduction is generally not changed for existing acquisition indebtedness. The deduction for new loans after December 31, 2017 will generally be limited to the interest on $750,000 of acquisition indebtedness. The deduction for home equity indebtedness will be suspended beginning after December 31, 2017 and before January 1, 2026. Generally, taxpayers will not be able to claim a deduction for interest on home equity indebtedness after December 31, 2017.
- The Act will increase the individual limit on annual charitable contributions as a percentage of Adjusted Gross Income (AGI). The limit will increase to 60% of AGI for cash contributions made in tax years beginning after December 31, 2017 and before January 1, 2026.
- The state and local tax deduction is capped at $10,000. Unlike earlier proposals, the $10,000 may include state income taxes or sales tax in addition to property taxes. The new provision is effective beginning for tax years after December 31, 2017 and before January 1, 2026.
- Miscellaneous itemized deductions subject to the 2% floor under current law are suspended after December 31, 2017.
- The medical expense deduction is retained with some temporary changes.
- The moving expense deduction is suspended for tax years beginning after December 31, 2017 and before January 1, 2026. Likewise, the exclusion for qualified moving expense reimbursement is suspended.
- The education savings plan rules are changed to allow payment of certain expenses up to $10,000 per year in connection with attendance of a student at a public, private or religious elementary or secondary school. The definition of eligible expenses was narrowed before the final Senate vote. This provision is effective after 2017.
- Alternative Minimum Tax (AMT) for individuals is retained but is significantly modified. The AMT exemption amounts increase by approximately 30%. More importantly, the phase out of the AMT exemptions begins at $1 million for married taxpayers filing jointly and at $500,000 for single taxpayers. These phase-out thresholds are substantially higher than current law. These Act provisions generally apply to tax years beginning after December 31, 2017 and before January 1, 2026.
- The estate tax is retained, however the amount exempt from the tax will be increased to $10 million for decedents dying after 2017 and before 2026.
Questions and concerns regarding this piece of legislation, please contact Leah Curtsinger, Federal Policy Director at [email protected] or (303) 866-9641.
You're Invited: CACI Federal Policy Council- February 6th
To learn more about NAFTA and US Tax Reform, please join us for on Tuesday, February 6th from 12:00-1:15pm at CACI.
Special Guest: Stéphane Lessard, Consulate General of Canada.