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What energy service and supply companies doing business in the U.S. need to know

U.S. tax reform and energy services

What energy service and supply companies doing business in the U.S. need to know

james rowling

Partner, U.S. Corporate Tax

KPMG in Canada


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US Capitol Building

On December 22, 2017, President Trump signed into law H.R. 1, the United States (U.S.) tax reform bill commonly referred to as the Tax Cuts and Jobs Act (the Act). The Act will result in the most sweeping changes to the tax code since 1986. A new road lies before us – implementation of the new law – and it's likely to be a long and perhaps bumpy one.

Below are our initial impressions of proposals that are considered to be of greatest importance for the energy services industry and how they may affect your business.

Corporate tax rate reduction
This provision would reduce tax rates in exchange for the elimination of certain tax benefits. For companies that currently have taxable income, which has not been the case for most in recent years due to persistently low commodity prices, lower tax rates could be favorable.

Limitation on the deduction of net business interest expense
The new limitation on interest expense could have a negative impact on highly leveraged companies and, as a result, transition of existing debt may have to be addressed.

Cost recovery - Increase expensing
This provision could have an important effect on M&A transactions. It increases the incentive for buyers to structure taxable acquisitions as actual or deemed (e.g., pursuant to section 338) asset purchases, rather than stock acquisitions, by enabling the purchasing entity in an asset acquisition to immediately deduct a significant component of the purchase price, and potentially to generate net operating losses in the year of acquisition that could be carried forward (subject, in general, to an 80 percent of taxable income limitation) to shield future income.

Repeal deduction for income attributable to domestic production activities
The deduction for domestic production activities provided under section 199, from which many energy services companies have benefited, is repealed for tax years beginning after December 31, 2017. The repeal of section 199 would offset some of the benefit of the lower tax rates for profitable companies in the oil and gas industry.

Financial reporting for publicly listed Energy Services companies will be affected. Companies of all sizes need to evaluate and respond to the impact of the new law proactively and promptly as there may be significant consequences to the businesses as well as its financial reporting.

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