Making it the largest tax reform in more than 30 years, the Tax Cuts and Jobs Act (TCJA) was passed with a key initiative in mind – increasing U.S. economic growth by providing more tax incentives for domestic businesses, primarily manufacturers. In fact, the industry anticipates saving an estimated $261 billion and adding nearly 6.5 million jobs in the United States over the next 10 years, according to the National Association of Manufacturers.
COREs tax incentive team highlights seven key ways manufacturers can expect to benefit from the new tax bill:
- New Corporate Tax Rate: The corporate tax rate has been reduced from 35 percent to 21 percent, effective Dec. 31, 2017. This new tax rate is highly favorable for manufacturers, as it should position them to obtain additional capital to purchase new equipment, hire more skilled labor, pursue growth opportunities and more.
- Bonus Depreciation: The bonus depreciation deduction has been expanded to allow full expensing (100 percent) for “qualified property” placed in service after Sept. 27, 2017, and before Jan. 1, 2023. Beginning in 2023, the deduction is then phased out over four years to 80 percent, 60 percent, 40 percent and 20 percent.
Under prior law, manufacturers could only use bonus depreciation for new property but used property purchases can also now be applied toward this deduction. With 100 percent expensing in mind, manufacturers should be better positioned to plan equipment purchases within the next five years before it begins to phase out.
- Section 179 Expensing: Manufacturers can now annually expense up to $1 million of business property placed in service after 2017. The intent of Section 179 is to provide an additional benefit to small taxpayers, so the deduction is phased-out between $2.5 million and $3.5 million.
Like the new bonus depreciation rules, Section 179 expensing applies to both new and used property. However, Section 179 now applies to certain exterior improvements to real estate for which bonus depreciation is not allowed (specifically, roofs, A/C, heating, ventilation, alarms and security systems). Given that Section 179 can be phased out as a result of other asset additions for which bonus depreciation can be taken, manufacturers should plan the timing of asset additions that include the above assets.
- 199A Deduction Qualified Business Income of Pass-Through Entities: This new provision (applicable for tax years beginning after 2017 and before 2026) allows individual taxpayers who carry on a qualifying U.S. trade or business in the form of a sole proprietorship, partnership or S corporation, which is the case for many U.S. manufacturers, to qualify for this deduction.
A taxpayer’s who taxable income does not exceed certain thresholds may claim a deduction equal to 20 percent of qualified business income (comprised of certain items of income, gain, deduction or loss) generated by the qualifying business. However, once those taxable income thresholds are exceeded, then the calculation becomes much more complex, as it may be adjusted by wages paid, property owned or losses incurred.
The deduction may also be limited to 20 percent of the taxpayer’s taxable income with adjustments made for capital gains and qualified cooperative dividends, if this amount is less than the deduction calculated as described above. The deduction calculation is made at the taxpayer (owner’s) level, which subjects the allocation of the components that make up qualified business income to the same allocation percentages as the partnership or S corporation allocates them to the taxpayer.
- Research and Development (R&D) Tax Credit:Unscathed by the new tax law, this credit remains in place to continue to incentive manufacturers who conduct R&D in the United States. With the elimination of the Alternative Minimum Tax, manufacturers should see an even greater benefit from the credit. However, manufacturers will be required to amortize research expenditures over a five-year period beginning in 2022.
- Capital Expenditures:Manufacturers can now fully expense certain capital expenditures such as acquired property effective immediately. However, this will be phased out beginning in 2023, at a rate of 20 percent per year until 2026.
- Repatriation of Overseas Profits: A one-time tax of 15.5 percent on cash assets and 8 percent on non-cash assets held overseas will be imposed, whether they are distributed in the United States or not. This measure was aimed to incentivize international manufacturers to bring some of their business and assets back to the United States.
While there are several manufacturing tax benefits under the new tax law, one tax incentive eliminated was the Domestic Production Activities Deduction (DPAD). Beginning in 2018, manufacturers can no longer claim the 9 percent special deduction. However, this impact is expected to be offset by the significant reduction in overall tax rates.
With a tax reform of this magnitude, CORE’s tax team continue working together to interpret its impact on the industry. For assistance navigating the new tax bill or to conduct an analysis on how it may impact your business, contact us today.
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