The impact of the biggest overhaul of the U.S. tax code in three decades will spread far and wide starting next year, highlighted by a cut in the corporate rate to 21 percent from 35 percent, fully allowable deductions for capital expenses and lower levies on repatriating overseas profits.
In the run-up to the bill’s passage, U.S. chief executives had made few specific promises about using savings from a big reduction in the corporate tax rate to create jobs or invest in the country. That changed on Wednesday.
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.
With U.S. 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 organizations were able to minimize 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. It also won back $10,000 in deductions for property and local income taxes, a figure still far below what many upper-income families pay in blue states like California, New York and New Jersey.
Tech stands to benefit from repatriation. U.S. companies are sitting on $3.1 trillion in overseas earnings, according to an estimate from Goldman Sachs Group Inc. The largest stockpile belongs to Apple Inc. at $252 billion — 94 percent of its total cash.
Microsoft Corp., Cisco Systems Inc., Google parent Alphabet Inc. and Oracle Corp. round out the top five, data compiled by Bloomberg show.
One caveat is that the repatriation provision could generate a large tax bill. In Apple’s case, a 14.5 percent rate would equate to $36.6 billion in taxes, or about $7 a share, according to Bloomberg Intelligence.
Analysts expect the bulk of the tax savings to be spent on increasing dividends and share buybacks.
That should push U.S. equity markets higher, increasing the value of investments held by asset managers.
Firms such as Federated Investors Inc. and Franklin Resources Inc. 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 U.S. banks by an average of 13 percent, according to Goldman Sachs. Leading the way will be Wells Fargo & Co. (17 percent) and PNC Financial Services Group Inc. (15 percent).
Morgan Stanley says the overhaul is a net benefit for U.S. 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 U.S. mergers and acquisitions that would boost investment banking. And banks’ wealth management units are likely to see more money rolling in because the bill reduces tax rates on the rich.
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.
Lenders focused on consumers, such as Discover Financial Services and Synchrony Financial, are better positioned, because individuals already are unable to deduct interest expense, so there wouldn’t be a change in behavior, according to Morgan Stanley.
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.
Many conglomerates have been holding onto non-core assets because they didn’t want to generate a big tax bill on the sale.
But just like banks, private equity will take a hit on the lowering of interest deductions.
Financial firms use debt to fund acquisitions, and if borrowing becomes more costly that could disrupt their business models. It might also limit the size of deals.
The industry’s biggest companies, including General Motors Co. and Ford Motor Co., will benefit from the rate cut and the reduction on levies for repatriating overseas profits, according to UBS.
Big auto dealers, like AutoNation Inc., are also poised to do well because they are focused in the U.S. and pay high tax rates.
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 U.S. 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.