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8 Ways Manufacturers Will be Impacted by the New Tax Law

By: Kevin Connelly

While there are many good summaries of the new tax law, it can be overwhelming when trying to find only the changes that impact you and your business. This article focuses on some of the major items in the Tax Cuts and Jobs Act (TCJA) that impact manufacturers.

Before we dig in, it’s interesting to note that optimism among manufacturers was at an all-time high in the fourth quarter of 2017, when the tax bill was signed into law. According to a National Association of Manufacturers Outlook Survey, most respondents believe tax reform will help their businesses. More than half of respondents believe the tax reform will create opportunities to grow their manufacturing businesses. In fact, according to the survey, two-thirds of manufacturers considered “a vote against tax reform as a vote against their business.”

Let’s take a look at eight aspects of the new tax law manufacturers should pay attention to.

1. Reduction In Tax Rates

The tax rate for C corps is being lowered to a flat 21% of taxable income. The C corp graduated tax brackets have been eliminated. The rates for individual taxes that affect pass-through entities are being lowered across the board and manufacturers will also get an extra 20% reduction in taxable income. So the question then becomes, “Am I better off as a C corp or a pass-through entity?”

As with almost all tax questions the answer is, “It depends.”

In the short term, switching to a C corp might save taxes, but there is still the embedded double tax of a C corp on distributions and upon the sale of a business.

While each company’s individual situation has to be analyzed, the conventional wisdom is that usually it’s still better to be a pass-through entity from a tax standpoint. Also, remember that this could all be changed or revoked with the next change in administration in Washington, DC.

As always, you should talk with your tax advisor before making any decision on this.

2. Domestic Production Deduction

What the government giveth it also takes away!

Yes, tax rates were lowered, but the new tax law also removes the domestic production deduction under Section 199 of the tax code. Essentially this increases taxable income for most profitable entities by removing the 9% reduction in income allowed under this provision.

3. Limits On Deductibility of Interest Expense

I am sure you heard there were some changes to home mortgage interest deductibility. The deduction for business interest was also limited by the new tax law.

While it may not have a big impact on all manufacturers, there could be an impact on companies with low profitability and substantial debt (and thereby substantial interest). The interest deduction would be limited to 30% of adjusted taxable income. If you have less than $25 million in sales it won’t impact your company, but if you are larger it could impact you. It is meant to reduce the tax breaks for companies that finance operations by debt vs those that finance through equity or accumulation of earnings.

4. Research & Development Tax Credit

The good news is that the R&D tax credit remains in place, meaning companies that invest in new and improved processes and products can still generate tax credits. The bad news is that all R&D expenses now have to be capitalized and amortized over five years instead of being expensed in the year they are expended.

5. Depreciation and Expensing of Property

This area could be a book unto itself.

If you are familiar with current law, you know you have to capitalize certain acquisitions of property and depreciate over certain useful lives on formulas prescribed under the tax code. The tax code then allows an election under Section 179 to expense certain assets, up to certain limits, instead of depreciating. It also allows BONUS depreciation on other certain assets where you can “depreciate” 50% of that asset before applying regular depreciation. Oh, and let’s not forget that certain assets like vehicles may have their depreciation limited depending on the type of car it is.

Clear as mud, isn’t it?

Under the new law, depreciation and expensing rules have been expanded to allow for greater expensing and greater depreciation across the board. Figuring out whether or not to expense vs bonus depreciate an asset — and which assets to apply them to — has become a major area of tax planning in itself.

The bottom line: depreciation is no longer a simple process, especially for larger companies.

Another thing to be cautious of is applying the rules to personal property subject to Maryland personal property tax. If you do not follow the rules and instead capitalize and then expense the asset through depreciation accounts, you might run afoul of the personal property tax division that has its own set of rules.

6. Alternative Minimum Tax

The corporate AMT has been repealed but it remains in place for individuals, although the exemption amount has been increased. This is another factor that has to be considered in the C corp vs pass-through evaluation.

7. Net Operating Losses

Although you might have a profitable company now, a few years ago you might have generated net operating losses that you have been carrying forward.

In the past you could use the losses up to 100% of regular taxable income and 90% of AMT taxable income if you were a C corp.

The new law, however, limits the use of those loss carry forwards to 80% of your regular taxable income. This means that you might now owe taxes under the new law, whereas you may still have had losses to utilize to reduce taxable income to zero under the old law.

Was this what they really had in mind or was it an unintended consequence of trying to deal with current operating losses?

8. Technical Corrections

Speaking of unintended consequences … with almost every major bill like the new tax reform law, there follows a “technical corrections bill.”

What is this? When a new law is finally applied in the real world, someone usually realizes that the new law is doing something — positive or negative — that they didn’t anticipate. Usually that bill fixes minor items but in today’s political environment it wouldn’t be unheard of for the technical corrections bill to be held hostage for some other unrelated reason.

You might remember the frantic rush by individuals to pay next year’s property taxes in late 2017 to beat the $10,000 limit in 2018 itemized tax deductions, only to be squashed by IRS releases that limited when you could actually pay ahead of time and take that deduction.

The point is that sometimes the best laid plans go out the window when a technical correction bill gets issued, or when the IRS releases new regulations or clarifications.

The technical corrections bill that’s bound to be issued will be a more formal way of closing loopholes or opening doors that were shut unintentionally.

More to Consider

The new tax law is quite large and sweeping. The related regulation changes are even larger. The points above are just the tip of the iceberg to illustrate how the new tax law impacts manufacturers. For a broader overview of the tax law, check out our blog post, Here’s How the New Tax Reform Law Will Affect You and Your Business.

Also, keep in mind that states will follow with their own regulations, which will either maximize or minimize the impact of the federal law changes.

Need Help?

Contact us online or call 800.899.4623 to learn more about how the TCJA affects you and your manufacturing business.

Published January 30, 2018

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