In this episode of The Sound of Automation podcast, Wipfli partner Mike Devereux and founder of Inside Beltway Omar Nashashibi join as we break down the complex world of tariffs and tax legislation. We start with a clear explanation of the three main types of tariffs and how they impact businesses beyond the headlines. As policies shift rapidly under the current administration, Omar shares a timely update on the latest developments and what they mean for business strategy. We also explore how companies can stay agile in the face of uncertainty and what to expect next on the tax front.
Omar Nashashibi 00:00
This is going to the Supreme Court. We've always known that.
The question comes down to whether or not the law explicitly allows the president to take a tariff action under that AIPA law of 1977. The Court of International Trade that heard this on May the 28th said that the president does have the authority to impose tariffs just under this law. They cited several other options that the president has, and that's an important point that I think we should come back to later, that regardless of what happens with these court challenges, this administration is committed to a tariff strategy.
Intro/Outro Narrator 00:34
Welcome to the Sound of Automation brought to you by Wipfli, a top 20 advisory and accounting firm.
Bryan Powrozek 00:53
Hello and welcome to the Sound of Automation. I'm your host, Bryan Powrozek. Joining me today, I have two guests coming on to speak about all things tariffs and tax. But before we actually get into the topic here, just some quick introductions.
The first guest joining us here is Omar Nashashibi of Inside Beltway. Omar, how are you doing today?
Omar Nashashibi 01:15
Doing well. Thank you for having me.
Bryan Powrozek 01:17
I guess if you wouldn't mind just giving everybody a little bit of your background and talk about the kind of work that you do at Inside Beltway. Sure.
Omar Nashashibi 01:24
Absolutely, so I'm based here in Washington DC where I've worked and lived since 1998. I've been a registered lobbyist for 25 years here in the nation's capital. I primarily work on areas ranging from manufacturing to folks that are in distribution. My primary expertise is on tariffs trade tax policy, EPA OSHA regulations... If it has to do with manufacturing, I tend to work on it
Bryan Powrozek 01:48
Excellent. Thanks Omar. And joining me again, Mike Devereaux. Mike, how are you doing?
Mike Devereux 01:52
Doing great, Bryan. Thanks for having me again. Appreciate it.
Bryan Powrozek 01:55
Yeah. And so hopefully listeners of the podcast recognize Mike. He's been on a couple times talking about, he's a self-professed tax geek, loves all things tax. And so he's really in his element right now as there's all these discussions and debates up in the air around tax. But yeah, I guess to get things kicked off, we're going to start off talking about tariffs, which I think there's lots of coverage out there, different changes in tariffs, what's happening today, what's happening tomorrow, et cetera. But I think a lot of folks probably just don't even understand kind of tariffs 101. So Omar, if you wouldn't mind, can you kind of just take us through the basics of tariffs and kind of what they are, how they're applied, et cetera?
Omar Nashashibi 02:40
Sure, just to put it in perspective, when I first started lobbying here in Washington on tariff issues, that was during George W. Bush, and we were dealing with just one tariff.
Now under Donald Trump this year, fast forward 25 years later, there's multiple tariffs that are in effect, and I know we'll get to the court cases in a minute, but let's look at what the president's doing. You've got this International Emergency Economic Powers Act of 1977. That's the tariff actions that he's put in place across the board. Those are the reciprocal tariffs on China and the rest of the world that are now at 10%, and also the Canada and Mexico for non-USMCA certified products at 25%. So he's used this law from the 1970s across the board on all countries. But then he's used another law called the National Security Tariffs, 232. That's action taken under a law all the way back from the early 1960s. These National Security 232 actions are on products, whereas the IEPA tariffs that are currently being challenged in courts are on countries. The 232 national security tariffs are the ones that the president used beginning in 2018 during his first term on steel and aluminum. And those remain in place today, and he's expanded their use to now cover cars and parts, and also as we'll get into it, using the 232 national security law for other future actions as well, but also on products. And then the third category is one that many people tend to forget. Starting back in 2018, then President Trump began to impose tariffs on China under Section 301 of the trade laws of 1974, and that 301 action was maintained by former President Biden and remains in place today. So you have around roughly 6,800 imports from China, currently subject to a 25% tariff under those 301 actions, and another 3,200 imports at a 7.5% rate. So I think a lot of folks forget that you've got these current IEPA tariffs that are adding up to 30% right now on China, but there's still some other tariff actions taken on. So let's not forget we're tariffing on countries, tariffing on products, tariffing on vessels, and also we've got some leftover tariffs from the first administration.
Bryan Powrozek 04:46
Yeah. And those, and those all, they can be cumulative, correct Omar? Like depending on the nature of the product or the locations coming from, et cetera.
Omar Nashashibi 04:55
That's absolutely right.
They do stack and even regardless what happens with the court some of these are adding up quite a bit You're looking at right now as of this recording There's some products coming in from China that exceeds 70% tariff rate when you combine and add them all up And that's why it's important not to take all the tariffs as one singular action But to remember they are each specific in and of themselves and that's how they end up stacking and you can exceed as we saw earlier 145% when it came to last month when they combine all those before they drop lower
Bryan Powrozek 05:27
Yeah, excellent. Thank you.
So and I think that that's one thing, you know, we've, we've learned about this administration so far is that things are, are changing almost on a daily basis. And so I know that this doesn't make for very evergreen content. But I guess, Omar, you referenced it earlier, as of June, June 3, at 108 p.m. Eastern time, I guess, can you give just kind of where we stand things, you mentioned some court cases, other stuff, just kind of where does everything stand as of right now?
Omar Nashashibi 05:56
Absolutely. And where we are, as we mentioned, there's three different cases dealing with trade right now that are going on, different laws that he's using on tariffs. The Section 232 tariffs that I mentioned about products, in his first term, the Supreme Court upheld his use, saying under that tariff law from 1962, the president has the authority to declare a national security case and impose those tariffs on steel and aluminum. So it's important to know that that has already been upheld by the Supreme Court.
What we're talking about now is where he's trying to apply tariffs on countries for a national emergency under that AIPA of 1977. That's what's going through the court challenges right now from state attorneys general, from a number of different small business groups and other entities as well. As of this recording, as you've mentioned, there's been a number of court challenges. And ultimately, working our way backwards, this is going to the law explicitly allows the president to take a tariff action under that AIPA law of 1977. The Court of International Trade that heard this on May the 28th said that the president does have the authority to impose tariffs just under this law. They cited several other options that the president has. And that's an important point that I think we should come back to later, that regardless of what happens with these court challenges, this administration is committed to a AIPA, could be a 301, 232, 122, 338. These are all different parts of the trade laws that this administration is prepared to use regardless of the outcomes of this court case. So let's work our way backwards. We are hearing here in Washington DC that regardless of who wins or who loses, this appeals court case. And there's a number that have been consolidated that ultimately it's going to be appealed to the US Supreme Court. The Supreme Court's October term is going to conclude here on either the week of June 23rd or the week of June 30th. So that's an opportunity for potentially the Supreme Court to issue a ruling on whether or not the president exceeded his authorities under the AIPA of 77, but there's one more fallback date. And that is July the 9th. The reason that's another date where we could maybe see the Supreme Court extend beyond its current term and render an opinion during the emergency session on their emergency docket is because on July the 10th at 1201 AM, all these reciprocal terrorists, the president threatened on April the 2nd, jumped back up. They're temporarily at 10% to cross the board, but they're going to go up to maybe 50% on Europe, going up to 46% on Vietnam, 26% on India, if there's no agreement with these countries. So we do believe that we won't have to wait much longer for possibly a decision from the Supreme Court, either in the final weeks of their current term or possibly as part of an emergency docket, but certainly ahead of that, July 9th, is what we're hearing here around Washington.
Bryan Powrozek 08:48
Yeah, and so we've got the we've got the potential that, you know, whether we're depending on where the courts land on this, you know, but still, there's the president does have some leeway on some of these things and potentially some other avenues, as you mentioned, you know, Mike, Omar you had something you want to add?
Omar Nashashibi 09:07
One more because we're trying to game this out. And I know I think Mike's going to start talking about how folks are trying to deal with this. And a lot of companies are trying to figure out how to handle all the back and forth. And now the uncertainty of a court case weighing even further.
And let's game this out. What if the Supreme Court does strike down the president's authority, then they have to go back in the court of international trade already says that businesses can seek refunds to the time that they paid this. So now you're looking at a post summary correction or possibly an appeal that could take months if not years for it to come together. So this would not be over even if a court does render that he exceeded his authority, not just because the president can seek other remedies through other parts of the trade law, but also the companies are going to have some time before they can get their money back if that's the ultimate outcome.
Bryan Powrozek 09:56
Yep. So, so then Mike, that kind of kind of sets you up, I guess, what, what are you seeing? How are you seeing business owners respond to this? Right?
I mean, it's almost like we should rename this podcast from the sound of automation to the sound of uncertainty. Cause it seems every, every episode we're talking about how to navigate some other uncertainty in the market. So, uh, how are you seeing business owners respond to this to, to maintain agility, but then also be able to strategically plan far enough in advance that you can, you can affect some real benefit for your company.
Mike Devereux 10:27
You took a couple of words right out of my mouth. Agility is kind of the name of the game right now, is be able to flex and change. And that requires data and knowledge of your parts, of your harmonized tariff codes that you should be using, making sure that you're using the right harmonized tariff codes, making sure that you have suppliers not changing them after they've been using the same harmonized tariff codes for a number of years for the same parts or same products or goods coming into the country.
We're seeing, if you're bringing in goods from China or Mexico, or excuse me, Canada or Mexico, are your goods certified under USMCA? Because that's gonna be really important to make sure that you are not subject to those tariffs, at least as the law stands today, as the policy is today. And looking at scenario planning, do you have domestic options for some of the parts or goods or tooling that's coming into the United States that you've historically used foreign suppliers for? And then what's the upside, right? From a sales opportunity, can you capitalize on this in some way, shape or form? These are kind of the top three or four things that our clients are doing. We have a list of maybe 20 or 25 things that I don't think, I think I'd bore some of your listeners if I just sat down and rattled all the way things that we could be helpful on or what we think our clients should be thinking about. But those are kind of the main ones is, how is this going to affect my strategy going forward? How does it impact my sales team? How does it impact purchasing and operations? Do I trust that my accounts payable clerk is paying the right amounts on all of my goods and services? So are you putting systems in place to maybe make sure that I am being compliant given the added cost and burden that seems to be present in today's macro environment?
Omar Nashashibi 12:16
Well, I think, Mike, because it's changing so often, what you just mentioned is getting those systems in place. It's one thing for everybody to be caught up by surprise when the president takes action, but you don't want to be the only one caught by surprise and having to react very quickly.
You want to be able to already anticipate, can you pivot to another supplier? Is there a backup? How do I speak with my customer and say we can mitigate some of the challenges? And you said something extremely important on the suppliers. Often to no fault of their own, the supplier doesn't know what the tariff rate is. And so you yourself sometimes have to check them and saying, no, that's actually on a special list. It's exempt from these IEPA tariffs because there was a subsequent action that was taken by Customs and Border Protection. So you staying on top of that and working with teams such as those at Whipli will help you create those systems. But right now we're getting notices from Customs, their cargo messaging service constantly with updates. And you've got to be on top of that pretty regularly.
Bryan Powrozek 13:12
Yeah, and this really and this isn't you know, Omar, you gave the example there of that, you know, depending on how it goes in the course. I mean, this could be a June, July thing, or even months past that, depending on if there's an appeal and other things like that.
But realistically, this is a, this is just the way business operates now, right? Because in three and a half years, depending on who wins, you know, you could have a new administration comes in that has a whole different view on how to utilize tariffs and, and maybe they go down. So business owners, you know, it's not like this is just a 2025 issue. That they need to tackle. This is a going forward, how to make your business more resilient, more agile type issue.
Omar Nashashibi 13:50
You're absolutely right. I was on the Hill on Thursday of last week. I had about half dozen meetings on both House and Senate side, Republicans and Democrats. I mean, all were on taxes, but one was on trade.
And in that trade meeting, we were absolutely talking about how this is the long-term we're going to see. Regardless, not to get into the politics, but at 2028 Republican or Democrat, when they're looking at states such as Pennsylvania and Michigan and others, they're going to be thinking about tariffs. They're going to be thinking about competition with China and the manufacturing industrial base that are in those key congressional states and districts and presidential race areas. And so we know from Capitol Hill standpoint as policymakers, we do see tariffs and the trade that flows through Washington, the decisions that are made here in this town really affecting supply chains throughout the country, throughout the world for the next several years and into the next administration as well.
Bryan Powrozek 14:39
Yeah, and Mike, we've seen similar, just to use the automotive industry as the example, right? There was a heavy focus on electrification from the previous administration, a shift in focus and a lot of suppliers and manufacturers all started kind of gearing up for that.
And now you've seen it kind of unwind a little bit, focus more on a platform where you can provide any sort of power plant, as opposed to just electric or just internal combustion. But I guess, how are you seeing, are you seeing a similar thing within the clients you talk to?
Mike Devereux 15:17
Yeah, absolutely. The pendulum continues to shift. And we're seeing that not just in orders and the slowdown of the EVs that came about over the last 18 months or so, but also in policy. As Omar said earlier, just moments ago, everything is kind of going through Washington, whether that be the tariffs that are imposed on automobiles or automobile parts from a tax bill perspective. And I know we're going to get into that later today.
There was a rollback of a lot of the Inflation Reduction Act, tax credits and incentives that encouraged some of the EV platforms that we saw years ago. And so that pendulum does, to your point, just keep swimming back and forth. And we're going to see it continue to move for lack of a better direction to the right over the next two and a half years.
Bryan Powrozek 16:09
Yep. Well, and that's, I think that's a perfect, uh, set up for the next part of it.
So let's, let's talk tax legislation. I mean, there's a, there's been a lot of, uh, activity over the last couple of weeks. Um, I guess, I don't know, Mike or Omar, whoever wants to kind of take the lead on that, like where, where, where do things stand again? Well, I'll preface this by saying now it's, it's a one 19 PM Eastern on June 3rd. Where do we stand as of right now?
Omar Nashashibi 16:34
As we stand right now, the House of Representatives has passed what we call HR1, that is the legislation that they needed to move that would set the Senate up to finally get moving on their tax bill. The House did move forward on a number of key provisions under the Tax Cuts and Jobs Act. They extended a number of them and made a handful of them permanent. I can let Mike get into some of the details on those there.
What we are describing to the clients for whom I'm lobbying on the tax bill, since that's our top non-trade priority right now, is really to look at the House as a baseline bill on number of the taxes. Because of the restrictions in terms of the amount of cuts and spending they were permitted, the House did not make many provisions permanent, such as the fix for R&D or restoring bonus depreciation. Those were done typically from 2025 through 29, whereas on the Senate, our conversations there are looking at extending a number of those key business-oriented provisions for ten years instead of the five put forward over on the House side. If we can't get ten, we're certainly hoping for permanent. We are expecting some other changes. The timeline is going to be pretty quick from what we're hearing based on meetings we're having on the Senate side with Republicans. This will be Republican-only built. They don't need any Democrats under the procedural maneuvers that they're using called reconciliation.
They are still targeting by the July 4th break to have a Senate package complete. It's unclear that they can get something to the White House for the President's signature ahead of them. However, a House source told us that if the Senate is close to their number on $1.5 trillion in cuts, they'll likely accept that and be able to move forward without a conference. But the Senate does seem like they want to put their own imprint to an extent. This is a very key week as senators just returned yesterday on Monday, June 2nd to Washington, and they actually just finished their luncheon for Senate Republicans about 20 minutes ago. So I'm eager to check my email and see what the next schedule is, but their hope is to move here in the next three or four weeks, and they've got some changes to make. And ultimately, like the birdbath, some of these bills are the bills going to have to go through. Senate parliamentarian is going to knock out some of the things that the House members put in there too.
Bryan Powrozek 18:37
So, Mike, I mean, just based on what you're hearing, I guess, anything that manufacturers should be thinking about or considering, is there planning for the second half of this year? Yeah.
Mike Devereux 18:49
You know, absolutely, there's probably 10 different provisions within the House pass bill that I think are really relevant to to the manufacturing community. Thankfully, I don't think any of them will be knocked out by the birdbath that'll be coming here through the Senate over the next coming weeks, but just to kind of rattle off some of them, low or tax, you know, keeping up the Tax Cuts and Jobs Act rates for individuals, which is very important for those manufacturers that are organized as S-corporations or partnerships.
You know, a fix for the big three, as it's been been quickly called in recent years, and that's the research expenditure 174 deductibility. That was fixed back to January 1 of 2025 and goes through 2029. Bonus depreciation, retroactive back to January 20th of this year, which happens to be inauguration date, 100% bonus depreciation, and then of course the interest expense limitation would go back to EBITDA, 30% of EBITDA limitation instead of EBIT. Other provisions, you know, one came out of left field for me anyway, was the increase of the Section 199A rates to 23%. International rates, those were changed with the GILTI, the foreign drive intangible income tax, as well as the BEAT. The SALT, that was been kind of a moving target and it kind of settled around $40,000 limit, but there's some phase out amounts once adjusted gross income starts to exceed a half a million dollars. As I mentioned earlier, a lot of the energy credits were rolled back and just before it passed the House, there was a management amendment that really kind of accelerated some of the expiration of some of those. And then finally, kind of a new provision, QPP, Qualified Production Property, and that's going to be important for companies that are looking to build new manufacturing plants or new production facilities, and that's a hundred percent real estate right off.
There's still a segregation component it looks like, things like R&D and office space and sales space don't necessarily qualify, but all the production facility piece would. So that's kind of where we stand from a House perspective.
I mentioned at the beginning of this, Omar, you think any of this is gonna get knocked out by the Senate parliamentarian or those provisions that find are important for manufacturers, for lack of a better term, say.
Omar Nashashibi 21:10
Most of those manufacturing provisions seem like they're gonna they've got a budgetary implication so they're gonna make it through the final the real question is how big they are I'm speaking about that manufacturing facilities placement service by 2032 construction start by the end of 28 around Trump's term that we heard was coming from the White House so we'll see how much that gets changed not necessarily a lot of champions on Capitol Hill the 199 a on that they're not done for you pass-throughs out there there's a lot of a lot of conversations happening this is one of the more more difficult conversations on Capitol Hill especially as it relates to a lot of service-oriented entities and that are not that are being canceled out from the salt and then we are still trying to increase even that 23% even further for certain entities though there's gonna be some other changes that come out from the tax side of it but we're hearing that probably by the third week in June we should have a pretty good sense of where we are on those on those tax provisions coming out and what really needs to be reconciled in general I think the taxes will be a little bit more generous on the Senate than we were over in the house the IRA you're right on some of those inflation reduction act climate-oriented provisions it's a red line for a lot of House Republicans and some factions over there but at the same time there's a lot of red states that are benefiting it and some senators really see that
Bryan Powrozek 22:25
And just to kind of underscore something you said, Omar, a little bit ago is that, again, you're looking at maybe a five, 10-year horizon. They would like these to be permanent, but there's only so much that can be done in one shot here. So from the business owner perspective, don't breathe the huge sigh of relief once we get through the next couple of months and we have better clarity.
It's, to Mike's point earlier, about building the system, putting the processes and controls in place to allow you to be agile and flexible is only going to benefit your company as you go forward here.
Mike Devereux 23:00
You know, Bryan, I did miss one provision and that was the accounting methods provision. They, you know, in the housepass bill, they increased that threshold. It was originally in 25 million index for inflation, which puts you around 31 million today, but they can be on the cash basis of accounting. Now this is for tax years 2026 and thereafter, but it would be if you're over 80 million dollars, excuse me, under 80 million dollars of average annual growth receipts, but it retroactive back to 2017.
So you index for inflation, that threshold was right around 100 million. So going forward, if you're less than a hundred billion dollars of average annual growth receipts, there might be some new methods of accounting that are available to you. Maybe you don't have to comply with the UNICAP rules. Perhaps you could be on the cash basis of accounting if that makes sense for you. So just some more tax planning opportunity that comes out of this.
Omar Nashashibi 23:52
Yeah, the particular focus on small business is a theme that you're going to see out of this final package here, not just in the messaging, but in the actual provisions that are in there and how to encapsulate more of those businesses and more of those entities that are in smaller. So that provision that you mentioned is really critical, especially looking at 179, how they now increase small business expensing to two and a half million.
That's a bipartisan provision that's been floating out there for some time. So there's going to be a lot and I think companies really need to work with teams like yours to figure out that there's not just what you're reading in the paper, there's a lot in here that can really benefit small manufacturing businesses if this gets through.
Bryan Powrozek 24:26
Excellent. Well, Mike and Omar, I appreciate it. I know you guys have a very busy schedule, so I appreciate you carving out some time for this recording. And thanks again for the insights.
I think it's definitely topics that a lot of our listeners are eager to hear about and would love to just have some clarity for once, but that's where we come in and help them try and navigate through the fog. So thank you.
Omar Nashashibi 24:49
Thank you for having me.
Intro/Outro Narrator 24:50
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