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Border-Adjustment Tax 101: What Small Businesses Need to Know

Of the many hot-button issues on the new administration’s agenda, a proposed overhaul of U.S. tax code — or Border-Adjustment Tax Plan — that’s favored by Republicans in the House of Representatives is raising a lot of concern.

A border adjustment essentially adds a tax at the border to imports and subtracts it from exports,  impacting everything from auto-parts manufacturers, toy companies, apparel companies, and retailers, to name a few.

For example, under the proposed tax code, if you’re a toy company that imports raw materials or finished product from China, you wouldn’t be allowed to deduct the cost of those goods from your U.S. taxes. However, if you export product out of the U.S., it would be exempted or not counted as income on your U.S. taxes.

As the Wall Street Journal reported, big retailers are fighting this, but its impact will likely be felt much more deeply by small businesses down the supply chain, including shipping volumes and other logistical considerations.

Business Breaker or Level Playing Field?

Many small business owners fear potential layoffs or having to raise prices as they deal with increased cost of goods sold. Some say they’d have to shut down entirely.

More than 95% of U.S. importers have fewer than 250 employees, according to 2014 U.S. Census data. If the proposed tax plan change happens, many don’t have the cash reserves to weather the storm or flexibility to re-align their supply chains to get the tax breaks.

Meanwhile, small businesses who export or produce domestically view it as a field-leveling opportunity as they can be more competitive on price.

Those who support the plan say the dollar will rise to offset the tax change. According to the WSJ, “Economists say that the tax change would help push up the dollar—which would in turn lowering the cost of imports and help to offset the extra taxes.”

So, what are we really talking about here when it comes to tax liability and tax benefits?

Here’s generally how it would work, according to an example used in the article:

What questions remain around the Border-Adjustment Tax Plan?

The bill hasn’t been released yet, and a lot still needs to be resolved, including how to treat financial services who do a lot of cross-border transactions that don’t really qualify as traditional imports.