Published On

January 25, 2017

Amid the stock market’s so-called “Trump rally” and rampant speculation about new government policy initiatives, successful entrepreneurs are likely to be faced with a series of key decisions this year. Given the nature of business leaders to get out ahead of any potential issue, there may be a temptation to act as soon as possible, but for all the investment and media activity that has followed last November’s election, few facts are known yet about what direction tax and economic policy changes will take.

The complexity of the situation is compounded by the fact that entrepreneurs face decisions on at least three levels:

  1. They will have to adjust to changes that will affect their immediate personal tax situation.
  2. They will have to adapt their businesses to a changing tax and regulatory environment.
  3. They will have to reposition their investment portfolios in response to legislative changes.

Again, there is not enough definitive information to make such decisions just yet, but considering possible implications can help you be ready when the time comes.

Patience on Taxes

While there is a fair amount of optimism about potential tax reforms, the hard part is that the year may be well under way before we actually know much about what this year’s tax rules are. For people who like to make decisions with their eyes wide open, this leaves no choice but to defer certain decisions until the tax picture becomes more clear.

That affects not only decisions about taking gains or losses, but also decisions that involve potential deductions such as charitable contributions and mortgage interest.

Where possible, then, it may help to defer such decisions till later in the year. At the same time though, it pays to keep things in perspective. The best financial decisions are informed by their tax implications, but not primarily driven by them.

Corporate Taxes: Simplicity May Be a Virtue

The business community is eagerly awaiting the prospect of lower corporate taxes. For entrepreneurial companies, there may be an added benefit to how proposed rule changes affect them as opposed to large, multi-national corporations.

Among the changes being discussed are removing or reducing incentives for US corporations to shift income realization to foreign subsidiaries. Further, if protectionism develops from verbal sparring to actual policies, companies that are heavy importers and/or exporters will get hit the hardest.

Economists can – and probably will – endlessly debate the overall merits of those changes but, should they come to pass, it does seem to indicate an advantage to organizations with relatively domestically-oriented operations and markets. When compared with the impact on large multi-national corporations, smaller, more entrepreneurial firms may well find that simplicity is a virtue under the new administration.

Investment Repositioning

It’s natural for entrepreneurs to focus first on their businesses when assessing changes to tax and economic policy, but the magnitude of changes being discussed could ultimately trigger a rethink of their entire investment portfolio.

After all, the outcome is not as straightforward as deciding whether new policies will be pro-business or pro-investment. Things like changes to health care and new infrastructure spending programs would alter the fortunes of entire sectors. On a more micro level, tax and policy changes could affect things like how capital investments are financed, how income is realized, and import/export relationships. Such changes would have differing impacts from one company to the next, and so portfolio adjustments will have to be assessed accordingly.

Another important wild card in all this is the possibility of business and investments working against the headwind of higher interest rates. This goes well beyond whether or not the Fed follows through on its December rate hike. It also entails what impact deficit-raising spending might have on government bond rates, and the added push that might come if protectionism has an inflationary impact.

The S&P 500 started the year with a P/E of around 23, but rising interest rates would make such a high P/E harder to justify. It may well be that sector rotation, rather than a rising tide floating all boats, is what the market has in store for 2017.

On balance, will it be a good year for business and investments? Again, for all the talk, the policy decisions that will influence how good a year it will be still have yet to be made. If nothing else though, given the pace of change that seems likely, it is not going to be a dull year.

Barbara Goodstein SignatureBarbara GoodsteinPresident & CEO of TIGER 21