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2019 year-end tax letter: potential impact of rising tariffs

Authored by Paul Dillon and Jim Alajbegu

The "trade war" with China has led to higher tariffs, and now there is a chance for additional tariffs later this year. So what does this mean for business, especially manufacturers and companies with foreign operations?

According to an analysis by the financial forecasting firm Moody’s Analytics, the trade war with China has cost the U.S. economy 300,000 jobs this year. August employment data backs up this report. The economy created approximately 1.3 million jobs this year through Aug. 31. In comparison, for the same period last year, 1.9 million jobs were created. While this shows a slower growth rate overall, during this period, the manufacturing sector was practically stagnant adding just 3,000 jobs in August compared to 22,000 for that month last year. In addition, according to Federal Reserve data, the manufacturing sector contracted in both the January through March period and again from April through June.

A 15% tariff increase is proposed for December. A study by the National Foundation for American Policy found that the tariffs already finalized would cost American consumers thousands of dollars a year, not counting the pending increases or the possibility of further increases.

Key takeaway: Certain companies may experience transfer pricing issues with the increase in tariff pressure.

While economists are divided on whether this means a recession is on the horizon, you should consider some of the following tax planning steps.

  • Keep in mind that for most businesses, net operating losses (NOLs) can no longer be carried back to obtain a tax refund. This means NOLs will not turn into a cash infusion for your business if you recognize losses. Previously, many businesses counted on this in their liquidity planning.
  • Remember that going forward an NOL carryforward arising after 2017 can only offset 80% of current-year’s taxable income.
  • When making decisions on bonus depreciation and section 179 expensing, consider if an immediate deduction is more helpful versus taking annual depreciation deductions if you expect to be in a loss position.
  • Not every state conforms to federal NOL rules for state income tax purposes. Be sure to include the potential state tax effects of a possible business downturn.
  • We recommend preparing a multiyear projection to assist in the analysis of your position.

Tariff increases also have the potential to result in transfer pricing issues for some businesses, which, in turn, may have a difficult time resolving them. As of October 2019, Treasury has not issued guidance on this matter. Further, there is a lack of any recent experience in developing models that factor in raising long- and short-term tariff issues. 

Consequently, if your business is subject to tariffs, we recommend you review your transfer pricing model as soon as possible.

View more insights in the 2019 year-end tax planning letter >

Download the 2019 year-end tax planning letter >

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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