Delivering for Best-in-Class Wholesaler-Distributors
October 19, 2018

It has been almost ten months since the President signed into law the Tax Cuts and Jobs Act of 2017 (TCJA), and it is likely take additional months before we fully understand all of its provisions. The IRS has spent the last ten months writing the regulations and rules necessary to implement the new law, and Congress will be faced with the need to consider at least one “technical corrections” bill to fix the problems with the legislation that are being discovered as it is implemented (although in reality it is unlikely the Senate could muster the 60 votes necessary to pass even a non-controversial technical corrections bill).

NAW has been involved in the fight for tax reform for many years, and as reform finally became a real possibility last year, we had clear priorities critical to the distribution industry: leveling the uneven playing field in terms of effective tax rates for both corporations and pass-through companies and the preservation of Last-In, First-Out (LIFO) inventory accounting, which is widely used in our industry.

In the decades since the last major tax reform, the tax code had become filled with preferences that resulted in some industries, like wholesale distribution, paying effective tax rates at or even above the statutory 35 percent rate, while other industries paid rates in single digits – some even routinely enjoying negative tax rates.   Several years ago NAW helped organize the Coalition for Fair Effective Tax Rates to fight for reform that would level that playing field so that high-rate industries like wholesale distribution no longer paid a disproportionate share of the business tax burden.

The TCJA was widely seen as a business-friendly tax bill, and its authors’ intent was to have the new law encourage economic growth and job creation.   While opponents of the TCJA argue that it was simply “a tax cut for the rich,” the recent strong economic growth numbers and low unemployment suggest otherwise.

Key business provisions in the TCJA:

  • C corporation income tax rate reduced from 35 percent to 21 percent. Corporate AMT repealed. Both changes permanent.
  • Pass through businesses provided a 20 percent deduction from business income, not to exceed 50 percent of W-2 wages, and pay 37 percent on the balance for a blended business rate of 29.6 percent, down from 39.6 percent. Provisions expire at the end of 2025.
  • LIFO preserved.
  • Bonus depreciation increased to 100 percent for 5 years, reduced by 20 percent per year thereafter; expiring at the end of 2027.
  • Liberalized small business expensing.
  • Death tax exclusion doubled to $22.4 million per couple, $11.23 million per individual. Stepped up basis retained. Provisions expire at the end of 2025.
  • Transition rules eased for those converting to C corporation status.
  • An international territorial tax regime is established along with a “deemed repatriation” tax.

The Pass-through issues:

While the reduced corporate income tax rate was a clear and welcome change in tax law, the treatment of pass-through businesses was neither clear nor completely welcome. The initial promise of a 25 percent tax rate for pass-through businesses to achieve something close to “rate parity” with the C Corp 21 percent rate proved to be a promise unfulfilled. In fact, the original language in both the House and the Senate bill would have left pass-through businesses with effective tax rates over 30 percent; for some well over that number.

The representatives of the pass-through community in DC lobbied aggressively for better and fairer treatment of pass-through businesses as the final language of the legislation was being developed. While far from perfect, the final bill was much improved over all of the original proposals, providing qualified businesses with a 20 percent tax deduction, resulting in an effective tax rate of 29.6 percent.

Once the bill was signed, the Department of the Treasury began the process of writing the rules necessary to implement all aspects of the law. One issue of critical importance was the rule implementing Section 199A – the pass-through deduction – and one of the key issues for NAW and our partners in the pass-through community was whether the rule would allow pass-through companies with more than one business unit to aggregate the income from all of their legal entities in order to qualify for the deduction.

The proposed rule implementing the Section 199A pass-through deduction was released by the Treasury Department in August, and we were pleased that the rule broadly applies the deduction and will allow pass-through companies to aggregate income.


NAW has managed the LIFO Coalition since repeal was first proposed in 2006 by a Republican senator, and repeal has been repeatedly sought since by the Obama Administration and Republican tax writers. We long believed that the threat of repeal was far greater in the context of comprehensive tax reform than it had ever been.

Our battle to preserve the use of LIFO was rewarded when neither the House nor the Senate included repeal in their tax reform legislation, even though we had been clearly told by Senate Finance Committee staff that repeal was likely to be included in their reform bill. As we have done multiple times over the last decade, NAW and our colleagues in the LIFO Coalition asked our member companies to contact the Senate Finance Committee members to urge them not to include repeal in their bill.  NAW member companies rose to this challenge, and to good effect.   The Finance Committee opted to leave LIFO alone, a clear and notable win for wholesale distribution and a case study in how businesses can impact public policy by actively engaging.

NAW will continue to manage the LIFO Coalition since repeal could come up again, but keeping LIFO out of the this tax reform bill was a huge success – thanks to each of you who helped us preserve LIFO.