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The evolving trade and tax landscape in the US presents both challenges and opportunities for companies operating in industrial and commercial sectors. With the potential imposition of new tariffs and impending changes to federal tax laws, businesses should consider adopting strategic measures to help mitigate risks and leverage available incentives.
This blog explores key developments, their implications and proactive steps companies can take to potentially improve their tax and supply chain strategies.
The potential impact of new tariffs on businesses
The Trump Administration has imposed a series of new tariffs and tariff increases that are expected to significantly impact industries reliant on low-cost imports, requiring companies to reassess their supply chain, tax and financial strategies.
Understanding the business implications that tariffs present is an opportunity for companies to innovate and adapt. By proactively reassessing supply chains, operations, and financial strategies, businesses can not only mitigate risks but also uncover new efficiencies and market opportunities. Embracing these changes with a strategic mindset can position companies to thrive in an evolving economic landscape.
Key financial and cash tax efficient actions to mitigate tariff impacts
In response to the enactment of tariffs, business leaders may consider these cash tax strategies in their planning discussions:
- Align supply chain and tax strategies: Businesses may evaluate alternative sourcing strategies, including relocating supply chains or adjusting intercompany transactions.
- Inventory management adjustments: Companies may consider stockpiling inventory before tariffs take effect.
- Explore alternative sourcing: Businesses could benefit from shifting manufacturing operations or diversifying suppliers to reduce dependence on affected regions.
- Expand warehousing and storage: Investing in storage facilities in the US can provide supply chain flexibility while benefiting from federal and state tax incentives.
- Leverage beneficial accounting methods: Implementing favorable accounting practices for inventory and new contracts with suppliers and customers can mitigate financial risks.
- Evaluate manufacturing relocation: Moving production to the US could unlock federal and state grants, credits, and property tax abatements.
Tariffs may cause companies to encounter higher costs and financial strain. To manage these impacts, businesses may want to consider the following:
- Review port strategies: Some states, such as South Carolina, Virginia, and Georgia, offer tax credits for increased port usage. Additional states offer other incentives for increased investment or jobs created by expanded port activity.
- Explore tax credit utilization: Companies can explore investment tax credits, cost segregation studies, and energy efficiency incentives to offset increased costs.
- Monetize clean energy tax credits: The Inflation Reduction Act (IRA) allows companies to sell and buy tax credits, creating an opportunity to manage cash flow effectively.
The business impact of potential federal tax law changes
The anticipated upcoming federal tax legislation may include corporate tax changes and adjustments to clean energy incentives. These changes could impact investment decisions and operational costs for businesses. Key areas impacted:
Inflation Reduction Act (IRA) credits
While a complete repeal is not expected, modifications to clean energy incentives could impact planned projects.
Recommended action: Companies may consider assessing their project timelines and exploring state-level incentives as potential substitutes.
Manufacturing incentives
Potential incentives include reducing the corporate tax rate from 21% to 15% for US-based manufacturers and other provisions.
Recommended action: Companies should model tax savings based on these provisions and plan capital expenditures accordingly.
R&D expensing and bonus depreciation
The potential reinstatement of Section 174 expensing for R&D and 100% bonus depreciation could benefit businesses engaged in innovation and infrastructure development.
Recommended action: Companies should consider evaluating their eligibility for immediate deductions and determine the net benefit against interest expense limitations.
State tax considerations
Consider state tax credits as well as incentives, such as abatements, that may be available due to increased investment and operational changes.
Changes at the federal level may have disparate impacts in the states if the deductibility of state business taxes becomes limited for federal income tax purposes. Companies may want to assess the potential effect of possible federal tax changes on state tax liabilities and the value of state incentives.
Recommended action: Businesses should monitor state conformity to new federal provisions and assess potential impacts on their overall effective tax rate.
Strategic steps for businesses moving forward
Given these potential trade and tax policy shifts, companies may want to consider adopting a proactive and data-driven approach:
Immediate Steps
- Assess the impact of tariffs and tax changes: Conduct financial modeling to understand cost implications and opportunities.
- Evaluate supply chain adjustments: Identify alternative sourcing and production locations to reduce tariff exposure.
- Review tax planning: Leverage available tax incentives and deductions and apply beneficial accounting methods to offset rising costs.
Long-Term Strategies
- Invest in US manufacturing: Consider pursuing incentives where operations are expanding.
- Monitor legislative developments: Stay updated on federal and state tax law changes to adapt quickly.
- Leverage professional expertise: Work with tax and trade consultants to navigate complex regulatory landscapes effectively.
Gaining a competitive edge in a changing environment
The business landscape is shifting with new tariffs and potential federal tax changes on the horizon. Companies that proactively analyze their supply chain, tax and investment strategies will likely be better positioned to potentially reduce risks and capitalize on available incentives.
By taking informed, strategic actions now, companies may be able to secure a more competitive edge and drive long-term growth in an evolving economic environment.
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