U.S. companies of all sizes — from members of the Dow component to smaller firms both private and publicly traded — shared their observations with Wells Fargo on the impacts of The Tax Cuts and Jobs Act of December 22, 2017. Learn more.
What are the expected financial impacts of The Tax Cuts and Jobs Act (TCJA), approved by Congress and signed into law by the president on Dec. 22, 2017? How could this major tax reform affect corporate financial practices and capital allocation strategies?
U.S. companies of all sizes — from members of the Dow component to smaller firms both private and publicly traded — have shared their observations with Wells Fargo. Supplementing these conversations are comments from CEOs and CFOs during earnings calls with investors on the impacts of TCJA. These combined sources present a composite picture that’s generally very positive about the anticipated financial effects of tax reform.
There are many provisions of TCJA for corporations to evaluate. However, three major provisions likely will have the most immediate consequences:
- Marginal tax rate. TCJA reduces the marginal Corporate Tax Rate from 35% to 21% to improve cash flows.
- Expensing of investments in qualified property. Businesses are allowed to immediately and fully deduct the cost of investments in qualified property for the next five years, including investments in used property. This removes certain investment barriers.
- The shift to a “territorial” tax system. Multinational corporations can access their currently “stranded” offshore cash because it became taxable at significantly reduced rates. Future access to earnings generated outside the U.S. becomes subject to a new minimum tax regime with no incremental U.S. tax on those earnings. This frees overseas cash for repatriation and investment and eliminates the potential tax friction for U.S. companies to make profitable investments outside the U.S.
Capital allocation practices
Several consistent themes have emerged around how companies plan to respond to improved cash flows. Anticipated actions include:
- Providing employees one-time cash bonuses, higher wages, increased 401(k) contributions, and accelerated contributions to pension plans.
- Returning to shareholders the bulk of offshore cash through larger share repurchase programs and/or increased dividend payouts. Offshore cash is mostly concentrated in a handful of technology, healthcare, and consumer product firms.
- Gradually increasing M&A activity, both in the U.S. and cross-border, reflecting management confidence based on higher cash flows.
- Allocating incremental capital toward R&D and debt reduction.
Several things will not change as a result of tax reform:
- Companies have given no indication of relaxing investment standards.
- They will continue to critically judge all opportunities by the same hurdle rate standard in place prior to TCJA.
- Companies also do not expect to dramatically change capital budgeting decisions related to investments in property, plant, and equipment.
- The benefits from previously existing accelerated depreciation already allow for fairly quick write-offs of most capital investments.
It will take several years for the full results of TCJA to become measurable. In the near term, companies are assessing carefully the material effects on cash flow and weighing strategic plans for cash deployment.