From uncertainty to optimism about enhanced sales growth, the sweeping overhaul of the U.S. federal tax system that Congress approved at the end of 2017 is generating a range of reactions in the promotional products industry.
The broadest and most significant changes to the tax system in more than 30 years, the federal reform affects all tax-paying Americans and businesses.
From a business perspective, highlights include replacing the graduated tax rate structure for corporations, which featured a top tax rate of 35%, with a flat rate of 21% – a change that will reduce the tax liability of many C corporations. Among other pro-business changes, the plan doubles the maximum allowed Section 179 deductions, and hikes the first-year bonus depreciation deduction from 50% to 100% for five years before phasing it out over the next half decade.
Of course, families and individuals will feel the impacts of the tax overhaul, too. While there’s ample debate about the extent to which many Americans will benefit or not under the changes, the tax plan doubles the standard deduction for individuals while lowering tax rates for personal income tax brackets.
In the promo space, some distributors are heartened by the tax changes, saying they could stimulate the economy in general and help propel more robust buying of promotional products. “I believe budgets for promo spending will rise,” Vicki Clayman, president and CEO of Kansas-based Partners N Promotion (asi/350153), told Counselor. “It is a cause-and-effect that I have seen over 34 years. Larger corporations ease spending caps when they have more cash flow. They need to promote their businesses. I see many giving back in incentives to their employees as well.”
Mitch Mounger, CEO of Top 40 distributor Sunrise Identity (asi/339206), is bullish too. “We expect the market to continue to react positively to tax reform, driving larger spend in our industry,” Mounger, whose firm is based in Bellevue, WA, told Counselor. “Many companies will have additional cash to drive sales through marketing.”
Marc Simon, CEO of Top 40 distributor HALO Branded Solutions (asi/356000), also foresees the potential for tax reform to help increase industry-wide sales – at least a bit. “There may be additional funds available to businesses to invest in their marketing and their brands,” Simon, whose distributorship is headquartered in Sterling, IL, told Counselor. “I would expect to see a modestly greater uptick in volume for our industry than might have otherwise been the case.”
At some promo companies, principals anticipate that, internally, their businesses will reap immediate rewards from tax reform – rewards that benefit employees while making the companies more competitive. “As a C Corp, Sunrise Identity will benefit greatly from the reduced federal tax rate, adding significant money to our bottom line,” said Mounger. “We plan to use the additional cash to hire more and invest in continued growth.”
Similarly, Christopher Bernat anticipates positive results from tax reform at Vapor Apparel (asi/93396), the supplier firm he co-owns in South Carolina. “We are set up as an LLC or ‘pass through’ business so we will have a lower tax structure until 2025 when those breaks expire,” Bernat, who serves as company chief revenue officer, told Counselor. “We have been investing in the business for years, and there are certainly some additional incentives to do so with the tax code changes. For me, this is a return to something closer to ‘fair’ for companies with revenues of $25 million and below.”
Additionally, Bernat thinks greater cash flow from tax breaks could influence promo companies to speed up their investment in automation. “This will help spur on more customized products,” Bernat said. “The ability to expense more aggressively in the coming years will make these investments easier to stomach.”
Back at Partners N Promotion, Clayman believes the new tax laws will help bolster overall profits at the end of 2018. That would be great news for Partners N Promotions employees, as enhanced profits could power a welcomed return for them through the company’s profit sharing plan.
Simon, meanwhile, said that the tax laws will not influence HALO’s plans, but that the distributorship will be the beneficiary of some of the changes. “We have several million dollars of infrastructure investments that will go on line this year,” Simon told Counselor. “The accelerated depreciation – the entire investment being deductible this year – will create a tax benefit for us, even though we had already committed to the investments. The reduction in tax rates from 35% to 21% is certainly helpful, but the added free cash flow does not impact our plans. Our liquidity was already more than adequate.”
Simon did, however, sound a note of caution for debt-laden industry firms. “Any companies in our industry that are highly leveraged will find the reduction in income tax rates offset by the new limitation on interest expense deduction to 30% of earnings before interest, taxes, depreciation and amortization (EBITDA),” he noted.
Elsewhere, some promo companies are considering changing their filing status to make the most of the advantages the new tax law offers. “We are an S-Corporation, thus this will not have any immediate impact, but we will be looking into the possibility of changing our classification based on the new changes and the possible upside,” said Memo Kahan, president of Top 40 distributor PromoShop (asi/300446).
While seeing the potential for positives from tax reform, Kahan said it was too soon to say exactly how the federal changes will impact the promo marketplace and the economy as a whole over time. A number of other promo executives at leading industry distributorships and supplier firms provided a similar forecast, saying they were still puzzling out what, if any, potential benefits and/or challenges could arise given their companies’ particular situations.
While some analysts have predicted that tax reform could drive a rise in stock buybacks, increased R&D spending and major M&A activity, others say it’s premature to say how such things might play out.
“I believe tax changes will be positive in the beginning, but have no idea how they will be spoken about in two to three years,” said Kahan. “There is still a lot to learn and understand regarding the new laws. We are optimistic that it will allow us to continue to grow and evolve.”