How to Figure Out How the Border Adjustment Tax Will Affect Your Business

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Rick Woldenberg is CEO of Learning Resources, Inc.
, a 150-employee manufacturer of educational materials and educational toys based in Vernon Hills, Illinois with offices in Gardena, California and Kings Lynn, England.  Rick joined the company in 1990 as a member of the third generation in his family business, and has served as CEO for nearly 20 years. 

RickChanges to the Federal tax system are coming, and it could be hazardous to your business’ health. House Republicans are hoping to implement a “Border Adjustment Tax” (BAT) later this year. This tax is being presented as a form of value-added tax (which is common outside the U.S.) but in fact, the BAT is actually an income tax designed to punish U.S. importers and support U.S. exporters.

Have you calculated the impact of this law on your business? You should. And if you don’t like the numbers, you should start calling your Congressman.

The impact of this proposal on toy businesses will be dramatic, since our industry imports most toys from Asia. The big change in the BAT proposal is that you will lose your right to deduct imported COGS (yes, you read that right), but will be able to exclude all export revenue from taxation. This combination of terms makes the tax system “destination-based” which the House Republicans believe will eliminate the incentive to seek offshore tax havens. Before you start to cheer, you should do the math. The BAT also permits full deductibility of (domestic) CapEx in year one (no more depreciation) but takes away the interest expense deduction. Tax rates will fall, to 20% for “C” Corps and 25% for “S” Corps.

This is a radical change in how our Federal taxes are calculated. Because COGS is such a big number relative to earnings in most toy companies, tax bills will no longer be tied principally to profits. This can produce some very surprisingly results. Here is a simple tool to estimate how the BAT will affect your business. [The form is modeled for “S” Corps at the highest marginal tax rate but you can substitute different tax rates that may apply to your business.]

Fill in the chart below to see how your taxes will change.

Current Law:

2016 Net Taxable Income (current law):                       $_____________________ (A)

Federal Taxes (A x 39.6%)                                           $_____________________      

BAT Taxes:

2016 Net Taxable Income:                                           $_____________________ (A)

2016 Domestic CapEx                                                 $_____________________ (B)

2016 Export Sales (gross revenue)                              $_____________________ (C)

2016 Interest Expense                                                 $_____________________ (D)

2016 Imported COGS                                                  $_____________________ (E)

BAT Tax Base (A-B-C+D+E)                                        $_____________________ (F)

BAT Federal Taxes (F x 25%)                                      $_____________________

How did your company do under the new law? If you export a lot, you may find yourself a winner!


If, on the other hand, you import most of your products, you may find your taxes skyrocketing to more than your actual earnings, even at the new lower rates. In the case of our company, this exercise produces an estimated tax bill of 165% of Net Taxable Income. Ouch. Ouch, indeed.

Now that I have your attention, what can we do to stop this? We must make our voices heard. In particular, members of the House Ways and Means Committee need to hear from you. If you happen to reside in the Congressional district of a Republican on Ways and Means, you have a particularly ripe opportunity to be an influencer. The committee is busily writing up the law right now so there is little time to waste. Please take the initiative to go to Washington, or at least, visit your local Congressional office. Letter writing campaigns, email blasts, and lots of phone calls from your employees can also make a difference. The time to exercise your First Amendment rights is now, before the law is released.

In Part II of this article, I will review the flaws and unintended consequences of the BAT. Please follow my blog on the BAT: www.BorderAdjustmentTax.com.

Richard Woldenberg

CEO

Learning Resources, Inc.

Vernon Hills, IL

rwoldenberg@LearningResources.com

www.BorderAdjustmentTax.com

One thought

  1. All politic views aside, the proposed tax you discuss it absolutely ridiculous and harmful for not only the toy business but retailers alike.
    Thank you for posting Richard(s) and for your suggestion for us as business owners to further educate ourselves and exercise our rights.
    Here’s to a happy Toy Fair!
    Daryn Fillis
    CEO
    Distroller USA Inc.

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