Tuesday, January 17, 2017

How to Figure Out the Impact of Border Adjustments on Your Financials

Have you modeled the new law using real numbers yet?  Here's a quick primer on how to do it:

First, prepare a simple financial statement estimating your 2016 Net Taxable Income.  You can jump to Operating Earnings and deduct Interest Expense. 

Once you have determined your current tax base (Net Taxable Income), apply your Federal rate of income tax.  [We'll ignore State tax for purposes of this analysis.]

This is your expected Federal Tax Bill under current law.

Calculating your Expected BAT Tax Bill:

At the outset, I should mention that the plan is not written yet and so we are all guessing what it will say.  I will focus on the basic rules articulated in the "A Better Way" Blueprint.

-    New Federal Tax Rates:   20% for "C" Corps and 25% for "S" Corps.
-    Interest Expense is only deductible to the extent you have interest income.  Under present economic conditions, this probably means you will lose your Interest deduction.
-    Depreciation is 100% immediately deductible.  No more amortization.  This would presumably NOT apply to any investment you make that would considered an import "assist" like foreign molds or other tools bought overseas to make products overseas.
-    Export Revenue is not taxable anymore.
-    COGS is not deductible unless you buy the goods in the good ole' USA.  If you brought it across the border from anywhere, it is NOT deductible.  I would assume this applies to the landed cost, although if duties were included, that would mean you are going to pay a tax on a tax, which is probably wrong.  If duties are material in your business, you can exclude them for now.  This is just for fun anyhow.

Here's the worksheet:

Net Taxable Income (current law)                        $______________

Add COGS (value of imports only)                      $______________
Add Interest Expense (net)                                 $______________
Deduct domestic CapEx                                     $______________
Deduct Export Revenues                                    $______________

Adjusted Net Income (ANI)                                 $_____________ [Sum of the above]

Taxes (20% or 25% of ANI, as applicable)           $_____________

Compare this number to the tax number under current law.  I also suggest you compare your Net Taxable Income (current law) to the current law tax bill, the new BAT tax bill AND your all-in payroll (including payroll taxes, bonuses, incentives and temp charges).  Think about how  your incentives have changed, and how many jobs are threatened.

Now you know how this law will affect you.  Have you poured yourself a bourbon yet???


  1. Richard.......I noticed that you suggested pouring a bourbon! You might have suggested a Scotch. After the BAT this import drink and a host of other geographically unique products will be whole lot more $$$. You can't make Scotch in the US so the Congress is picking winners and losers. BTW Bourbon/Tennessee Whiskey exporters might experience a downright chilly reception in the currently expanding foreign markets!

  2. Well, fortunately Bordeaux is still an option, too. Not for long, perhaps.

  3. Hi all,
    Do you know how this will affect LLC's? Where can I read more about it? Many thanks!!

    1. Pass through entities might see great change or experience great incentives to change under the Brady Plan. The rate for pass throughs is expected to be 25%. You can read about the impact on pass through entities on pages 31-33 in this very good paper: "A GUIDE TO THE GOP TAX PLAN – THE WAY TO A BETTER WAY" by David Weisbach. https://poseidon01.ssrn.com/delivery.php?ID=100104064008118096074117093023081126060049030043069035029003110010110027119005091097056102018016038120029020078066004104081088105084013078067069068072106075079017029020111077109096028006097002026083097084079119113084084102090070018006071064068103&EXT=pdf