Issue Date: January 22, 2018
Tax bill is saving companies money
Less than a month after the Tax Cuts & Jobs Act landed on President Trump’s desk for signature, chemical companies are starting to report benefits from the lower taxes.
Polymer maker Covestro says it will record a one-time windfall of $100 million in 2017 due to the new rules. The German company says its overall tax bill will decline from 28% to 24% in 2017 and another one or two percentage points in 2018.
The Thai firm Indorama cites the new “low-tax environment” as one reason it has decided to build a fiber plant in the U.S. The plant, a venture with Huvis Corp., will make low-melting materials used in the thermal bonding of composites.
Large U.S. chemical firms will likely outline the impact of the law when they announce earnings in the coming weeks.
A number of provisions of the tax bill should affect chemical companies. Firms will see their U.S. corporate tax rates decline from 35% to 21%. The bill also allows them to repatriate earnings stockpiled overseas at a reduced tax rate.
“There is no question that companies are going to enjoy more cash as a result of U.S. corporate tax reform,” says Kevin McCarthy, a chemical stock analyst with Vertical Research Partners. The companies McCarthy covers will see their taxes decline on average by 1.9%, he estimates.
“In terms of how it might be spent, I think you are going to see a broad range of outcomes in terms of increased capital spending, share repurchases, and possibly an uplift in M&A activity,” McCarthy says.
A key feature of the law is that manufacturers can now immediately expense 100% of their outlays for capital purchases, such as equipment, instead of spreading them out over a number of years. “That is designed as an incentive for businesses to make investments,” says James Brandenburg, a tax expert at the accounting firm Sikich.
However, a provision of the bill that might be tricky for some firms is a cap on interest payments at 30% of earnings before taxes. The cap, Brandenburg says, can hit companies that have a lot of debt or that had a bad year.
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