– The corporate tax rate decreases from 35% to 21%, which will prompt companies to re-examine future facilities investments, particularly those that were previously directed overseas due to the prior after-tax advantage abroad.
– An accelerated depreciation timeline for certain capital improvements during the next 5 years will boost capital investments in the near-term.
– Revised tax rate on profits earned overseas significantly reduces the previous burden of double-taxation enabling companies to reroute those savings toward investments to strengthen their business’s fundamentals.
The long-anticipated overhaul to the United State Tax Code was signed into law by President Trump on December 22, 2017. The succinctly named “Tax Cuts and Jobs Act” is the first piece of tax legislation in recent history to dramatically alter both personal and corporate taxes in the United States since “Walk Like an Egyptian” by the Bangles ruled the airwaves in 1986.
As with any piece of legislation the bill received the standard chorus bipartisan rhetoric, as it made its way through the House and Senate. However, one of the most surprising things about the bill is the lukewarm reception by both individual voters, and U.S. corporations. Most poignantly at The Wall Street Journal’s CEO Council Conference on November 14, 2017, when the Wall Street Journal’s Associate Editor, John Bussey, asked the question “If the tax reform bill goes through, do you plan to increase capital investment?” to a room full of CEOs, the President’s chief economic advisor Gary Cohn retorted to the lack of raised hands “Why aren’t the other hands up?”.
After several weeks of speculation surrounding the Tax Cuts and Jobs Act, the bill was signed into law right before the holiday recess. Corporate executives, including corporate real estate executives, need to understand why changes to the U.S. Tax Code matter, especially since it has been 31 years since the last overhaul.
Here are three of the primary takeaways from the Tax Cuts and Jobs Act as they relate to corporate real estate executives:
1. The U.S. Corporate Tax Rate Just Became Competitive: The bill substantially lowers the corporate tax rate from 35% to 21%, thereby lowering the United States’ position in the top three corporate tax environments down to number 13 out of 35 countries in the Organization for Economic Co-operation and Development (OECD). This will prompt many companies that have invested into their “tax-advantage supply-chain” based on the old 35% U.S. corporate tax rate to re-examine their future incremental investments into facilities both domestic and abroad. Further, the lower rate will have a strong influence on companies that sought an after-tax advantage overseas in spite of lower production costs in the United States. Finally, this could change the status of many projects on hold because of the looming changes to the U.S. corporate tax code, since many of these projects will now see an enhanced after-tax return on investment in the U.S.
2. Expense Now, Depreciate Later: Back in 2017, capital or leasehold improvements for corporate properties generally fell into either the 39-year useful life or the 15-year useful life depending on various tests per IRS Section 168. This included what is classified as qualified improvement property such capital expenditures like roofs, heating and air conditioning and property protection systems (items with generally 20 years or less of useful life). However, with the new law businesses will now be able to take a 100% deduction (“bonus depreciation”) on qualifying assets (equipment, machinery, qualified improvement property and other short-term assets) placed into services after September 27, 2017 and before December 31, 2022. Important to note, after December 31, 2022 the bonus depreciation will be reduced by 20% every year thereafter until 2026, thereby creating a short-term incentive for companies to continue to make capital investments in the near-term.
3. Profits―Stuck Offshore No More: A key change that has been often overlooked, is that the United States has finally modernized the corporate tax code to a territorial tax system where profits are taxed by the territories in which they are earned. In previous iterations of the U.S. tax code, U.S. corporate profits were taxed again upon being transferred back to the United States, even after the corporations had paid the respective taxes in the foreign country where they earned the profits. This put U.S. corporations at a serious disadvantage over many of the foreign competitors. Luckily, the bill addresses the U.S. corporate profits currently stuck overseas; the bill will place a tax on cash or cash equivalent assets upon transfer back to the U.S. at 15% (versus 35%) and 8% tax reinvested foreign earnings. This will allow future profits to transfer back to the U.S. at a much lower rate than the previous 35%, and be invested back into physical infrastructure (plant, property and equipment), workforce or balance sheet restructuring.
These changes are expected to make a measurable financial impact to U.S. corporations. JPMorgan and Chase estimate that the tax reform bill on balance should boost earnings per share (EPS) for S&P 500 companies by $10 per share.
Further, when the Federal Reserve Bank of Atlanta surveyed executives in November 2017, nearly 40% indicated that they planned on increasing capital investment plans somewhat and 11% planned to increase capital investment plans significantly. Many have criticized the results of the survey since only a slight majority (51%) planned to increase their capital investments plans in 2018 to some degree. However, this glass half-empty analysis misses the broader economic message, that nearly half of U.S. corporations plan to increase (to some degree) their capital investment plans going forward, which will likely have a broader positive economic impact, to both companies and individuals.
Ultimately, what this means for corporate real estate occupiers is to expect the pace of projects to continue at a strong clip, and in some cases even pick up in the United States. This will continue to bolster corporate occupier demand across property markets, with a particular bias toward industrial-focused companies. This will continue to challenge corporate real estate executives to stay ahead of upcoming lease expirations in the face of climbing lease rates with declining inventories of available properties. In addition, it will require additional collaboration with the C-Suite to understand any directional changes as it relates to capital investment plans both domestically and abroad.
To learn more on how the 2017 Tax Cuts and Jobs Act will affect your corporate real estate decisions — please contact Colliers International Corporate Services Team to discuss further.
Andrew is a Vice President of Colliers International in the Indianapolis, Indiana office. Specializing in Corporate Solutions, Andrew is devoted to providing results-driven service to assist global corporate users achieve optimal real estate solutions. He is a former Corporate Real Estate Manager and Financial Analyst. He earned his MBA at the Krannert School of Management at Purdue University — and is passionate about understanding how geopolitical, tax and trade policy impact his clients’ future decisions.