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How the Senate’s Tax Bill Could Impact Semiconductors

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Part 2
How the Senate’s Tax Bill Could Impact Semiconductors PART 2 OF 11

The Senate Has Made These Amendments to the House’s Proposed Tax Bill

Senate amends proposed tax bill

The US Senate passed its version of the new tax reform bill on December 2, 2017, after making various amendments to the original House version of the bill. Analysis showed that the bill would add $1.4 trillion to the budget deficit, and this put pressure on the Senate to cut the cost of the bill by making amendments.

The Senate Has Made These Amendments to the House&#8217;s Proposed Tax Bill

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Corporate tax rate 

But the Senate didn’t change the original proposal to reduce the maximum corporate tax rate from 35% to 20%—the biggest reduction in the bill. The Senate did, however, push the effective date from 2018 to 2019 to reduce the costs of the measure in the first ten years.

This tax cut is something businesses, especially the tech companies (QQQ) like Intel (INTC) and Apple (AAPL) have been looking forward to.

The Senate version of the bill stated that the corporate tax cut would be permanent. However, concerns surrounding budget deficit have forced lawmakers to consider alternatives such as gradually increase the corporate tax rate over several years. Even President Trump is considering an increase in corporate tax rate to 22%.

Alternative minimum tax 

House Republicans originally proposed to eliminate the AMT (alternative minimum tax) for corporations, but now the Senate has proposed to retain the AMT but increase the exemption amount. The AMT calculates taxable income after limiting or eliminating certain deductions, credits, and other tax preference items.

The retention of AMT leaves a gray area wherein a company investing heavily in R&D (research and development) would get a tax rebate.

Interest provision

The original version of the tax bill allowed an interest deduction up to 30% of EBITDA (earnings before interest, tax, depreciation, and amortization), but the version the Senate passed changed this to 30% of EBIT. This provision partially offsets benefits from the above tax reforms as many technology companies are highly leveraged and have a huge interest bill.

For instance, Advanced Micro Devices (AMD) has huge interest burden, and it recently returned to profits. Capping the interest deduction on taxable income wouldn’t bring AMD the desired tax benefits.

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