U.S. Tax Policy Implications for Business

The United States tax system is complex and constantly changing. Changes to policy and regulations are being made that will affect small businesses and big businesses at their very core and in dramatic ways.  This article will discuss changes to U.S. tax policy and the implications that these may have on businesses, as well as strategies for navigating this dynamic landscape.

Understanding Recent U.S. Tax Policy Changes
The landscape of U.S. tax policy has undergone a lot of changes within the last couple of years, and businesses are required to catch up with these changes, understand their compliance implications, and maximize their financial strategies. Some of the areas in which businesses have been impacted include:

1. Corporate Tax Rates and Structure
Corporate tax rates have been changing in the last few years. For instance, TCJA reduced the federal corporate tax rate from 35%  to 21% through 2017. There have been new proposals, however, from this administration that would bring the corporate tax rate up to around 28%, which changes the way companies strategize for their tax liability and investments.

This might involve a review of their tax strategy as a business, especially in terms of corporate structure, deductions, and overall tax liability. For the larger companies, which would benefit from the lower tax rate, as the rate goes up, they may need to reassess their tax strategies.

2. Global Minimum Tax
The U.S. has also participated in the efforts of the world to introduce a minimum tax on multinational. This initiative, led by the Organization for Economic Cooperation and Development, or OECD, would end multinational companies’ abuse of tax arbitrage to avoid paying taxes on profits shifted into low-tax jurisdictions.

For globalized enterprises, this might entail transferring the tax base for reporting profit over against tax for tax purposes from one country to another. This could affect the international tax strategy businesses re-prioritize. In contrast, the impact of a global minimum tax may indeed raise tax liabilities, particularly for some corporate U.S. taxpayers whose international tax planning strategies exempt them from making such payments.

3. Capital Gains Tax Adjustments
Capital gains taxes, which are levied on income from assets sold, are one of the items that have recently shown up in politicians’ discussions in the U.S. government. The long-term capital gains rate is currently at 20%, but proposals have moved forward that benefit high-income earners by raising the rate. These bills could be an impetus for the sale of stocks, real estate, and business assets.

This will have extremely significant implications for exit strategies and investment choices both by businesses and entrepreneurs. It could create shifts in timing and structuring asset sales, mergers, and acquisitions due to the need for greater anticipated cash flow as higher capital gains tax rates take effect. So, if you are contemplating selling your business or conducting large-scale asset disposals, then knowing how this probable change will affect your tax liabilities is truly important.

4. Expanded Tax Incentives for Research and Development (R&D)
The U.S. government has promoted business investment in R&D. Over the recent past, the necessity to boost innovation and stimulate economic growth has been accentuated. The new American Rescue Plan Act contains provisions that enhance the tax treatment of R&D expenditures.

This is often offset by the various costs to businesses operating in industries that are heavily reliant on innovation, such as in the areas of technology, pharmaceuticals, and manufacturing. By understanding these nuances surrounding R&D tax credits, companies can unlock valuable tax savings toward long-term growth and the advancement of technology.

5. Changes in Deduction Policies
For decades, business expense-related deductions-from employee wages to equipment purchases-have been the central area of tax planning for businesses. However, changes that took effect recently-including suspensions of certain kinds of deductions for businesses based in high-tax states or interest expense deductions, or recently, deducting business interest under a new limit, may forever change the way in which businesses claim their deductions.

Businesses may also face high costs in terms of compliance when they track and report their expenses closely. The chance of ensuring available deductions while being compliant with new requirements is, therefore, important to minimizing your tax burden.

The Impact of Tax Policy Changes on Businesses
Tax policy changes can have wide-reaching implications for businesses, ranging from adjustments in cash flow to shifts in investment strategy. Below are some key areas where businesses may be impacted:

1. Increased Tax Burden
For example, one of the most direct impacts of modified tax policy is an increase in tax burden, especially when corporate tax rates are increased or deductibles are reduced. It lessens the cash available for re-investment in the business, hurting growth opportunities, hiring plans, or even other business strategies that could be employed.

To reduce the stress brought about by the increasing tax burden, firms would have to reassess their tax planning, ensuring that further credits, deductions, or investments could be scrutinized, which could bring down the taxable income of the firm. At times, there may be relief through business restructuring or alternative tax treatment.

2. Compliance Challenges
This also implies that tax policies will become more complex and intensive with increases in the number of changes. Businesses would feel more challenged in terms of their compliance with tax policies. Businesses may have new reporting requirements, changes in eligibility for credits or deductions, and changing tax deadlines. These actually put a significant administrative burden on businesses. Non-compliance with regulations could also lead to penalties, fines, and audits, which can add to business operations.

Continuous education and professional advisory services will keep the businesses updated on tax policy changes. A business can also provide the best possible compliance with state and national tax regulations and the lowest possible risks by partnering with tax professionals who specialize in tax regulation.