The headline news – a dramatic cut in the corporate tax rate – may be the easiest change to grasp. Otherwise, the “Tax Cuts and Jobs Act of 2017” – all 1,000-plus pages of it – is replete with new rules that will oblige media companies to rethink some approaches they’ve taken in the past.
There’s a lot in the new tax law that calls for close analysis on the part of publishers, said Steve Shelton, president of Way, Ray, Shelton & Co., P.C., Tuscaloosa, Alabama and a specialist in accounting, acquisitions and mergers in the newspaper business.
“Every company is different,” Shelton said. “It comes down to closely examining the part of the tax law that is most significant to a given company and then planning around that.”
1. Lower corporate tax rate – The corporate tax rate has been reduced to a 21 percent flat rate, significantly below the previous 35 percent rate. Like their peers in other industries, media companies that generate the majority of their revenue in the U.S. benefit most, since they generally have paid the highest rate.
“The rate reduction is immediate and it is all good news,” said Shelton.
2. New limits on interest deductibility – New provisions cap interest expense deductibility at 30 percent of EBITDA for the next four years. In subsequent years, the 30 percent deduction will apply to EBIT.
Large, highly leveraged companies that rely on debt to finance acquisitions and transactions especially will be impacted by the new rule.
“This will hurt highly leveraged companies,” Shelton. “Some media companies may find that the benefit of the lower overall tax rate is reduced or even erased because of the stricter limit on interest deductibility.”
There are some tax planning opportunities in this area, Shelton pointed out. mortage interest on real estate remains 100 percent deductible. And for consolidated taxpayers, rules regarding where the limitation applies – at a subsidiary or the parent company – may come into play.
“There’s time to analyze and plan,” said Shelton.
The new limit on interest deductibility goes into effect for tax years beginning after Jan. 1, 2018, “so for fiscal year companies, the new limits will not go into effect until next year,” Shelton said.
3. Bonus depreciation – Companies that look to add or upgrade equipment will have new incentive to do so. Under the new rules they will benefit from 100 percent immediate expensing on capital equipment other than real estate.
“This covers both new and used assets,” said Shelton. “I think it will have the largest impact on companies that are growing or upgrading their fixed asset pool, for example, investing in new technology.”
4. New deduction for pass-through entities – The effective tax rate for owners of pass-through entities such as LLCs, partnerships and subchapter S corporation will be lower under the new rules. Owners of these entities will now get a 20 percent pass-through business deduction of income that flows in to them, paying tax only on the reduced amount.
“Plenty of media companies are organized as pass-through entities and will benefit from this effective lower tax rate,” said Shelton.
In addition to the tax changes, publishers should be attentive to some changes in accounting standards on the horizon. Some of these changes from the Financial Accounting Standards Board (FASB) will take effect in 2019, Shelton said, but should be closely examined by individual companies today.
The new lease accounting standard generally will require companies to record 100 percent of all leases of more than one year in duration. Before, operating leases were expensed each time a payment was made, rather than recorded.
“This is a big change,” Shelton said. “Now, a company will have to record the liability on the books. More than likely, this will increase the liabilities that a company reports on its balance sheet,” potentially impacting banking relationships and calculation of loan covenant requirements. This change will be effect for private companies beginning with calendar year 2020.
Also on the way: new rules to determine when an entity reports all income in its financial statement. Timing of revenue recognition may not greatly impact the newspaper industry, but the new standards must be understood and followed.
“It’s important for any publisher to know these rule changes ahead of time, said Shelton. “It’s all about planning,” he added. “Don’t wait. You can miss out on the chance to make appropriate decisions that could really benefit your company.”
Way, Ray, Shelton & Co., P.C.,Tuscaloosa, Alabama, is a leader in solving the accounting and business needs of newspaper clients across the U.S.
Steve Shelton and his team of experienced newspaper accountants have worked on more than 70 acquisitions, sales, mergers, split-offs and like-kind exchanges. The company combines accounting and information technology expertise with extensive experience in the newspaper industry.
For information regarding WRS’s news media services, contact Steve Shelton, firstname.lastname@example.org or call 205.345.5860.