Time to Expand Into the US?
By Julia Klann, CPA, CA, KPMG Partner, US & Cross Border Tax Services
On December 22, 2017, President Trump signed into law the largest overhaul of the US tax system in over 30 years. The net tax cuts from the new law, designed to promote the creation of US jobs and investment in the American economy, will result in an increase in the US deficit of $1.5 trillion. As taxpayers begin processing the law, many Canadian businesses wonder what impact the US tax reform will have on their business. On the top of their minds may be the question: Is the time to expand into the US now?
In the past, many Canadian businesses were reluctant to set up formal US operations, even if the majority of their customer base was in the US. As the US corporate tax rate was among the highest in the world, business profits from US customers would be subject to a much higher tax rate in the US than in Canada, and therefore increase the Canadian business’ overall effective tax rate. One of the biggest cuts is the decrease in the US corporate tax rate from a top rate of 35% to a flat rate of 21%, effective 2018. Although a US taxpayer does pay state taxes on top of federal taxes, the impact of state taxes should result in a taxpayer either still paying a net rate of tax in the US, which is less than their rate of tax in Canada, or at most, the taxpayer may be indifferent as to which jurisdiction their profits are subject to tax. As a result Canadian businesses that previously avoided establishing a formal US footprint primarily to minimize their overall effective rate of taxes may now reconsider whether they want to have a more formal presence in the US.
The new law also provides favourable expensing provisions with respect to capital assets. Taxpayers can expense the full cost of many property additions in the US, such as computers, machinery and even certain leaseholds and components of buildings, as part of the tax cuts to promote investment in the US economy. These expensing provisions allow for a 100% depreciation deduction for the cost of the property, which could reduce taxes payable or even create a taxable loss to a US taxpayer. Many states also offer significant incentive packages to taxpayers wishing to expand into a particular state and create jobs in the local economy. Combining the benefit of capital asset expensing, state grants and incentives, the time to look at US expansion may be now for many Canadian businesses that have been on the fence with respect to setting up formal US operations.
Among favourable provisions for businesses looking to expand into the US, are tax simplification provisions for small businesses. A small business is defined as a business that has average gross receipts less than $25M over the past three years. Small businesses are not subject to interest deduction limitations imposed on other businesses. As a result, taxpayers can leverage their US expansion with debt. The interest payments allow the US business to repatriate earnings back to Canada without withholding tax, which may be appealing to many Canadian businesses. While the time to expand into the US may be now, there are nuances that could also create extra filing obligations for US taxpayers. Businesses should contact their local US tax advisor to discuss their expansion options.
If you would like to learn, more, on the US Tax Changes, check out KPMG’s TaxNewsFlash.