Some US Companies Are Investing Tax Savings in Learning and Development

Some US Companies Are Investing Tax Savings in Learning and Development

In the wake of the Tax Cuts and Jobs Act passed by the US Congress in December, which slashed the corporate tax rate from 35 percent to 21 percent, some large employers announced that they were raising pay, expanding benefits, or (most commonly) issuing one-time bonuses for their employees with the billions of dollars in savings they would gain from the tax reform package. Critics of these tax cut bonuses say they are a cynical attempt to curry favor with the Trump administration and mask the fact that investors are reaping the lion’s share of the rewards. Most of the windfall is being passed on to shareholders through dividends and stock buybacks, as the Wall Street Journal noted in a recent article noting the impact of the tax cuts on corporate earnings in the first quarter.

Some companies are investing their tax cuts in in employees in a different way. The aerospace manufacturer Boeing, for example, announced in December that it was investing $300 million of its tax savings in employee programs, one third of which would go toward learning and development (its total savings from the tax cuts are expected to be around $400 million a year, the Seattle Times reported in January).

In fact, many organizations are putting part of their tax savings toward learning: Our pulse survey on tax reform at CEB, now Gartner, found that among organizations allotting part of their tax savings to HR, 39 percent were investing in employee training, development, and education—the second most common target for these allotments after pay and benefits. (CEB Total Rewards Leadership Council members can see the full results of that survey here.)

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Apple Plans to Invest Repatriated Cash in New Jobs, Capital Improvements

Apple Plans to Invest Repatriated Cash in New Jobs, Capital Improvements

Apple announced on Wednesday that it was bringing hundreds of billions of dollars back to the US that the company had previously held overseas to take advantage of a loophole in the US tax code that has now been closed. In doing so, Bloomberg’s Alex Webb and Mark Gurman report, the company will incur a tax bill of around $38 billion, but it also plans to spend $30 billion over the next five years on capital expenditures, with which it expects to create 20,000 new jobs and open a new campus:

“We are focusing our investments in areas where we can have a direct impact on job creation and job preparedness,” Chief Executive Officer Tim Cook said in a statement Wednesday, which also alluded to unspecified plans by the company to accelerate education programs. Apple also told employees Wednesday that it’s issuing stock-based bonuses worth $2,500 each following the new U.S. tax law, according to people familiar with the matter.

These moves came in response to the tax reform package passed by the US Congress in December, which reformed the international tax system for corporations by removing a rule that let American companies defer paying taxes on foreign income until they repatriated those earnings, incentivizing companies to stockpile some $3.1 trillion in cash overseas. Apple was among the companies best known for taking advantage of the deferral provision and faced extensive criticism for doing so, including from President Donald Trump.

Other major US companies, including Walmart, have announced raises, bonuses, and other investments in their workforce in light of the major corporate tax cut enacted last month.

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Will Corporate Tax Cuts Give American Workers a Raise This Year?

Will Corporate Tax Cuts Give American Workers a Raise This Year?

The “Tax Cuts and Jobs Act” passed by the US Congress last month, which lowered taxes on corporate profits and most employees’ salaries, has a number of implications for employers, affecting payroll withholding as well as the tax treatment of executive pay and some employee benefits. One of the arguments the Trump administration and Congressional Republicans advanced for the tax cuts, which were historically unpopular among the American public, was that lowering the corporate tax rate would incentivize companies to use their tax savings to invest in their workforce, giving millions of employees a much-needed raise.

While several large employers announced plans to issue bonuses to employees, raise wages, or make other business investments after the tax reform bill was passed, most companies have indicated in earnings calls and surveys that they plan to parlay most of their tax cuts into debt repayment, dividends, and stock buybacks. Corporate America, Solutionomics founder Chris Macke argued in an op-ed at the Hill in December, was already sitting on large piles of cash and not prioritizing business investment due to insufficient demand. Companies, he wrote, need more customers more than they need more cash.

Whether or not US companies decide to invest more of their tax savings in growing their business (which they may still face public pressure to do), Bloomberg’s Rebecca Greenfield notes that these investments probably won’t come in the form of across-the-board raises. For most workers, the 3 percent annual raise, which has been standard for five years, will likely remain the norm in 2018:

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What Employers Need to Know About the US Tax Reform Act

What Employers Need to Know About the US Tax Reform Act

The “Tax Cuts and Jobs Act,” which officially passed both houses of Congress on Wednesday, will have a significant impact on employers throughout the US, by lowering taxes on corporate profits and most employees’ salaries, as well as by changing the tax treatment of executive compensation and a number of other rewards. Here’s a quick look at how tax reform will affect employers and employees, and what HR leaders need to be thinking about right away:

Corporate Tax Reduced

The act permanently reduces the maximum corporate tax rate to 21 percent from 35 percent starting in 2018, while providing additional avenues for businesses to avoid being taxed at higher rates. It also includes a one-time tax cut for corporations repatriating cash currently held overseas, and introduces a territorial tax system that imposes a 10.5 percent tax on future foreign profits, benefiting American companies that do a lot of business internationally. This change, which the tech sector is cheering, is meant to encourage businesses to reinvest their foreign profits in the US, but others say this approach has long-term costs that outweigh the apparent immediate benefits.

Some companies announced that they were passing a portion of their tax windfall onto their employees, either with across-the-board bonuses or increases in their internal minimum wage. Moves like these will please President Donald Trump and Congressional Republicans, who have long argued that slashing corporate taxes would lead to higher employment and wages. To critics, however, these announcements look more like public relations plays or attempts to curry favor with the administration, while investors, not employees, are expected to see the lion’s share of the gains.

Payroll Scramble

The first thing employers will have to do in the new year in response to these tax changes is to make sure their payroll deductions reflect the new rate and bracket structure, which has been significantly altered. The bill also dispensed with the personal exemption employees are used to using to calculate their taxable income, while roughly doubling the standard deduction. Payroll management companies Paychex and ADP say they expect to make these changes quickly and that employees should start seeing the new rates reflected in their paychecks as early as February. However, the Internal Revenue Service must first produce new withholding tables, which could take more time than usual given the overhaul the bill made to the system of deductions and exemptions. Employers will have to await further guidance on this from the IRS.

Executive Pay

The tax reform bill removes from the tax code a controversial provision introduced in 1993 that capped the tax deductibility of top executives’ compensation at $1 million, unless that compensation was “performance-based.” Originally intended to rein in the explosion of CEO and CFO pay packages, the measure failed to do so, and critics say it actually backfired by encouraging companies to shift executive compensation into stock options and pay for performance. Although it is unclear how the new rule will affect the way top-level executives are paid in the long term, it does give boards some decisions to make right now in order to maximize their tax benefit, such as whether to shift a CEO’s bonus payment from 2018 to 2017 so that it remains tax deductible. For more details, SHRM’s Stephen Miller has a helpful breakdown of the bill’s impact on executive compensation and payroll in general.

Other Employee Benefits

The bill changes the tax treatment of a variety of employee benefits, such as adding a new credit for wages paid to qualifying employees on leave under the Family and Medical Leave Act, but cutting the deduction for commuter benefits. SHRM’s Stephen Miller also provides a comprehensive explanation of these effects here.

Impact on ACA and Health Insurance Market

While Congressional procedure prevented Republicans from using the tax bill to formally repeal the mandate for individual health insurance coverage created under the Affordable Care Act, the bill takes the teeth out of the mandate by zeroing the tax penalty for failing to obtain coverage. This change will have major implications for the individual insurance market, potentially driving up premiums as healthy individuals exit the market, no longer fearing a tax penalty. The bill does not address other aspects of the ACA to which businesses have objected, such as the employer mandate and the so-called “Cadillac tax” on high-value health plans, but has emboldened business groups to push for more changes to these controversial policies in the coming year. As health care policy expert Timothy Jost explains in detail, scuttling the individual mandate will have some consequences for the employer-sponsored insurance market as well.