Does Tax Reform Provide Life Support for the Retail Market?
After the Tax Cuts and Jobs Act, the question remains whether the retail sector will reap benefits that will allow it to more easily navigate its evolving business model driven by changing consumer preferences.
Four months after the passage of the largest tax reform in 30 years, known as the Tax Cuts and Jobs Act (TCJA), the question remains whether the retail sector will reap benefits that will allow it to more easily navigate its evolving business model changes driven by changing consumer preferences.
The most significant impact of the TCJA to retail is the decrease in corporate tax rates, as most retailers are organized in corporate form. Under prior law, corporations were taxed on income at a graduated, four-step rate, which topped out at 35 percent. When adding in state and local income taxes, retailers often had effective tax rates upwards of 37 percent. With this lower federal rate of 21 percent, brick-and-mortar retailers will have more money to invest in marketing and distribution, making it easier to compete with e-tailers like Amazon.
In addition to the cut in the corporate rate, retailers may benefit from the reduced rates that individual taxpayers will receive starting in 2018. The TCJA widens the individual tax brackets while lowering the top tax bracket from 39.6 percent to 37 percent and maintains the bottom tax rate at 10 percent. This will put more money into consumers’ pockets, which retailers hope to translate into more spending at their stores. Geographically, these results may vary due to the limitation of state and local tax deductions in high-tax states such as New York and California.
Other provisions included in the TCJA, like special depreciation deductions, may boost development for some retail corporations. The TCJA has reinstituted the concept of “bonus” depreciation, which allows companies to immediately expense an investment in equipment, rather than depreciate it over a period of five or seven years. However, an oversight in the final TCJA draft omitted “qualified improvements.” Unless a technical correction is issued by the IRS, property that falls under this category would not be eligible for the immediate deduction and would instead have to be depreciated over 39 years.