THE impact of the biggest overhaul of the US tax code in three decades will spread far and wide starting next year, highlighted by a cut in the corporate rate to 21 per cent from 35pc, fully allowable deductions for capital expenses and lower levies on repatriating overseas profits.
Here’s how the law will most likely affect various industries:
Republicans firmed up late support for the overhaul by adding a measure that will provide a windfall to real estate investors like President Donald Trump. The change allows real estate businesses to claim a new tax break that’s planned for partnerships, limited liability companies and other so-called “pass-through” entities.
The tax bill may boost 2018 earnings of big US banks by an average of 13pc, according to Goldman Sachs
With US housing on a roll since the financial crisis, homebuilders don’t want to see the good times end. Incentives that have promoted home ownership over renting came under attack during the legislative process, but the industry’s powerful lobbying organisations were able to minimise the damage.
The bill will allow interest deductions on the first $750,000 in new mortgage debt, down from the current limit of $1 million; the House had called for slashing it to $500,000.
Tech stands to benefit from repatriation. US companies are sitting on $3.1 trillion in overseas earnings, according to an estimate from Goldman Sachs. The largest stockpile belongs to Apple at $252 billion — 94pc of its total cash. Microsoft, Cisco Systems, Google parent Alphabet Inc. and Oracle round out the top five, data compiled by Bloomberg show.
Analysts expect the bulk of the tax savings to be spent on increasing dividends and share buybacks. That should push US equity markets higher, increasing the value of investments held by asset managers. Firms could also see more demand for their money management services, thanks to tax cuts for individuals, especially the wealthy.
The tax bill may boost 2018 earnings of big US banks by an average of 13pc, according to Goldman Sachs. Leading the way will be Wells Fargo (17pc) and PNC Financial Services Group Inc. (15pc).
Morgan Stanley says the overhaul is a net benefit for US banks because it will help them compete better with lower-taxed international rivals. Many provisions in the bill, including repatriation of overseas cash, could spur US mergers and acquisitions that would boost investment banking.
But a reduction on interest-expense deductions will weigh on earnings. That provision may also cause companies to borrow less. It could be especially painful for banks such as Synovus Financial Corp. that have large exposure to real estate and commercial loans, Morgan Stanley said.
The reduction in corporate rates means companies should have more cash to fund acquisitions, which could increase the value of private equity-owned firms. There’s also likely to be more assets to buy.
But just like banks, private equity will take a hit on the lowering of interest deductions.
The industry’s biggest companies, including General Motors and Ford, will benefit from the rate cut and the reduction on levies for repatriating overseas profits, according to UBS.
Retailers are primed to be big winners from the rate cut because many generate all, or at least an overwhelming majority, of their income in the US and pay some of the highest tax rates of any industry.
Full and immediate deductions on capital expenditures could allow at least one retailer to not owe any federal taxes the next two years. Aaron’s Inc., which leases televisions and refrigerators to consumers at more than 1,700 stores, will be able to use deductions on buying inventory, which are considered capital investments, to wipe out its tax bill in 2018 and 2019, according to Stifel Nicolaus & Co.
In machinery, trucking is likely to see the biggest impact, according to Jefferies. The corporate rate cut would give US transportation companies of all sizes more money to upgrade their fleets with fuel-efficient vehicles.
The overhaul could be a boon for aircraft suppliers, like Boeing and General Electric, because airlines need to upgrade their fleets, too.
Oil-and-gas companies will be big winners because they pay the second-highest effective tax rate of any sector, at 37pc, according to Bloomberg Intelligence. But a number of oil explorers and equipment providers won’t benefit because their operations are unprofitable.
The coal industry notched a victory by getting the corporate alternative minimum tax killed — a move executives say will reduce bankruptcies.
Hospitals and insurers
The bill is estimated to boost insurance companies’ profits by as much as 15pc because they pay high rates, according Ana Gupte, an analyst at Leerink Partners.
US drugmakers will be one of the biggest beneficiaries of the repatriation portion of the bill. They’ve been sitting on billions of dollars in overseas earnings and can now bring home that cash at a reduced rate.
This is another industry that is likely to increase capital investments because telecom companies regularly need to upgrade their networks. And the bill allows deductions on such spending to be immediate, instead of over several years. AT&T Inc. has said it will invest $1bn more in US infrastructure next year under the new tax plan.
Colleges have objected to the reversal of a rule that allows supporters to make tax-deductible contributions to their teams, in return for priority seats at football and basketball games. The provision has been credited with the financial boom in college sports.
About 30 colleges and universities, including Harvard, Yale and small liberal arts schools such as Amherst and Williams, may pay a 1.4pc tax on their endowment investment returns. Schools that would be taxed have at least 500 students and more than $500,000 in endowment per student.
Colleges have widely opposed the bill, although the final version dropped a tax on graduate school tuition waivers that sparked an outcry.
By: Matt Townsend