In: Finance
Overview of the article: The article talks about cash flow tax and destination based cash flow tax (DBCFT) and what will be the changes that will impact U.S. Corporations. Cash flow tax means that for an organization its tax base will be determined not on the basis of its business income but on the basis of the cash flow that its business generates.
Cash flow tax, if implemented, will lead to a situation in which corporate will no longer be taxed at the marginal rate of 35 percent. Instead they will be taxed for the amount of cash that flows through their business. Certain deductions will be allowed and these deductions will be offsetting deductions that will reduce the amount of cash flows that will be subject to taxation.
Implications: The cash flow tax will have profound and significant implications for businesses. Companies will no longer be able to deduct expenses from their income to determine their taxable profits. So their interest expenses, selling, general and administrative expenses and depreciation of capital expenditures will become irrelevant. Instead the companies will be allowed to immediately expense its capital expenditure. This will reduce the amount of taxable cash flow.
The level of complexities for companies will reduce as they will no longer be required to track basis for their assets and capital expenditures. It will also eliminate the deductibility of net interest. In the long run companies will stand to gain as the tax system gets simplified due to cash flow tax.
Reference:
Cash flow tax. Retrieved from https://www.sullcrom.com/blogs-cash-flow-tax