How Will Trump's 2nd Administration Impact Your P&L?

Donald Trump’s recent resounding victory, along with the Republicans taking the Senate (+4) and likely taking the House (currently leading with 217 vs. 208 for the Democrats), will obviously have a major impact on US global policy, such as Ukraine, Taiwan, and the Middle East, immigration, inflation, and business costs, and last but definitely not least, a significant economic policy impact on business. 

While the dust is still settling, and it is unclear which policies will Trump's administration actually enact, their P&L Financial Impact will come in many shapes and sizes.

So, let's walk through a couple of them. As always, it is important to note that anything and everything is subject to change.

Now, this is pure conjecture, but to the extent that the US tariff policy that Trump has been talking about is actually enacted, and other countries (such as China) respond by imposing tariffs and cause a “tit for tat” process, this could worsen long term inflation and business costs, that the Fed has been working so hard to cut in the last while.

This trade war, along with Trump’s suggested immigration policy, closing off the border and deporting illegal migrants, thus minimizing the manufacturing workforce within the US, can have several implications for your P&L:

1. Costs of production will likely increase, due to the potential inflation and business costs, thus leading to a Cost of Goods Sold (COGS) increase. If you are using FIFO inventory accounting, this can lead to greater (inflationary) profit which can trickle down your P&L.
2. Possible lower consumer demand, due to higher prices, can decrease your sales.
3. If you cannot pass all of the inflationary costs on to your customers, this can decrease your gross margin
4. If you have debt, or are considering taking debt, and the inflation spins out of control, this can mitigate the interest cuts that have been discussed, and potentially increase the price of capital. Debt which is already prohibitively high can in theory, get higher, driving up your interest expenses and your balance sheet debt.

In addition to the potential negative economic policy impact on business that we discussed above, Trump has been speaking about several tax cuts and reforms, which can improve your P&L.

1. Walking back R&D rules - last tax reform (back in Trump’s first term), Section 174 of the tax code was amended, requiring taxpayers to amortize specific R&D expenses over a 5-year period for domestic R&D and for 15 years for foreign R&D. Meaning, instead of recognizing expenses related to research and development on an ongoing basis, as they were incurred, such expenses were capitalized and only recognized over a relatively long period. Now, Trump has said he will walk back on this, and presumably, the recognition of such expenses will be ongoing as incurred, thus increasing your OPEX expenses, and decreasing your operating margin for tax purposes.
2. Canceling the $10,000 SALT limitation on itemized state and local tax deduction, which was also part of the previous reform, will allow for greater deductions with respect to state and local tax paid, especially in “Blue” states with high local and state taxes.

Down to the tax portion of your P&L, it is presumed that certain portions of the previous tax reform, which phase out in 2025 will be extended, such as the QBI (qualified business income) deduction, which in certain cases allows pass-through entities to deduct up to 20% of their qualifying income. This could apply for partnerships, S Corps, sole proprietors and certain trusts (but not for C corps).

Last but definitely not least is the corporate tax rate, meaning the actual tax rate that C corporations will pay. Last time around, Trump reduced the corporate tax rate to 21%; he is now talking of reducing it down to 15%(!).. Obviously, this will have a major impact on your tax payment and on your net, post-tax profit.

While time will tell which of these will have more of a P&L financial impact, in any case, you should be listening to the winds of change, and we’ll be following them closely. You’re welcome to tag along.