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Tax Reform Impact on Manufacturers
The document summarizes the key impacts of the recent tax reform on manufacturers. Some of the major effects include: 1) Increased deductions for capital expenditures like Section 179 and bonus depreciation that allow for faster write-offs. 2) Lower corporate tax rates of 21% but individuals still face rates up to 37% so pass-through entities need to consider the new 20% Section 199A deduction. 3) The Section 199 domestic production deduction was repealed but a new 20% Section 199A deduction provides tax savings for certain business owners.
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Tax Reform Impact on Manufacturers
- 1. TAX REFORM IMPACTON MANUFACTURERS March 20, 2018 Live Webinar: 12 pm 1
- 2. …One Organization ata Time Building Competitive Futures
- 3. About IMEC Mission Committed toDriving Growth through Enterprise Excellence Vision Leading the way for organizations to create their competitive future
- 4. Committed to IndustryExcellence From manufacturing to healthcare, and education to other small business and service organizations, IMEC is committed to partner with organizations as they execute and succeed in all areas of Leadership, Strategy, Customer Engagement, Operations, andWorkforce.
- 5. A Validated LeadingEdge Model
- 6. Expertise Across Illinois Withmore than 50 full-time staff and partners positioned statewide, IMEC assists more than 500 companies each year with successful improvement and innovation projects.
- 7. The Impact onIllinois Communities IMEC has a demonstrated Return on Investment that exceeds 19:1 • 614 companies assisted • 3,677 jobs created and retained • $131,000 cost savings per client • $254,000 investment spending per client • $1.3M new and retained sales per client • $411,367,826 aggregate impact *Reported on annual NIST-MEP manufacturing survey
- 8. TAX REFORM IMPACTON MANUFACTURERS 1. Capital Spending & Depreciation 2. Tax Rates – C corp vs. Individual 3. Section 199A Deduction 4. Repeal of DPAD – Section 199 5. Accounting Methods & Inventory 6. Research Credit & Expenses 7. Business Interest Limited 8. Like Kind Exchanges of Personal Property 8
- 9. Glen Birnbaum, CPA Shareholderat Heinold Banwart, Ltd – CPA firm in East Peoria, Illinois Experience: • Tax – S corps, partnerships, LLC’s, & 263A inventory capitalization • Valuation – in particular: working capital targets in the context of M&A, due diligence, estate and gift tax valuation discounts • Audit – in particular: manufacturing and agriculture www.hbcpas.com 9
- 10. 1. Capital Spending •Section 179 • From $510,000 in 2017 to $1 million in 2018 • Bonus Depreciation • From 50% to 100% writeoff 2018 through 2022 • Can now take bonus depreciation on used assets www.hbcpas.com 10
- 11. Section 179 • Newor used qualified property • Can choose as much or as little as you want – very flexible to get to target taxable income • Expanded definition to include roofs, HVAC equipment, fire alarms, security systems (replacements) • Cannot create a loss • Phaseout starts at $2.5 million www.hbcpas.com 11
- 12. Bonus Depreciation • Newor used equipment. Previously had just been new • Generally elect “out” or “in” by class life (all 7 year property) – therefore less flexible • Generally for 20 year or less tangible property • Can create a loss with this deduction • No phaseout (largest companies can use this) www.hbcpas.com 12
- 13. 2. Tax RateComparison • C corporation rates lowered to 21% - flat rate no matter the income • 21% rate equates to about 100,000 if taxable income for a manufacturer under old C corp rate structure • In IL with state C corp rate at 9.5% but deductible, overall effective tax rate is about 28.5% www.hbcpas.com 13
- 14. 2. Tax RateComparison • Individual Rates (S corp, partnership, LLC) • Rates lowered - top federal rate lowered to 37% with potential to be 29.6% with full 199A deduction (37% x 80%) • Brackets widened – see next page • State and local income taxes limited to $10K at individual level, making most business state income taxes nondeductible www.hbcpas.com 14
- 15. 2. Indiv. RateComparison www.hbcpas.com 15 Old Law New Law ---Married Filing Joint--- ---Married Filing Joint--- Lower Upper Rate Lower Upper Rate $ - $18,650 10.0% $ - $19,050 10.0% 18,650 75,900 15.0% 19,050 77,400 12.0% 75,900 153,100 25.0% 77,400 165,000 22.0% 153,100 233,350 28.0% 165,000 315,000 24.0% 233,350 416,700 33.0% 315,000 400,000 32.0% 416,700 470,700 35.0% 400,000 600,000 35.0% 470,700 39.6% 600,000 37.0%
- 16. 3. Section 199A •Brand new code section (guidance forthcoming from IRS) • Expires January 1, 2026 • Applies to taxpayers other than C corporations • 20% deduction on net business income • Can reduce the top individual federal rate down to about 30% www.hbcpas.com 16
- 17. 3. Section 199A •Taxable Income Limits • If under $315,000 taxable income (married) • Only limit is 20% of overall taxable income at individual level • If over $415,000 taxable income (married) • Also limited to greater of • 50% of wages paid by the business OR • 25% of wages paid plus 2.5% of qualified property • Between - $315,000 to $415,000: Phaseout www.hbcpas.com 17
- 18. 3. Section 199A •Are wages more than 40% of taxable income? • Temp wages vs. regular wages? • Guaranteed payments to partner owners = DQ • Qualified Property – 2.5% • Unadjusted cost basis of property • Factors in for the greater of 10 yrs or the depreciable life of the property • Equipment = 10 yrs • Building = 39 yrs www.hbcpas.com 18
- 19. 3. Section 199A •Trade or Business? • Owner Occupied Property – triple net lease • Manufacturer paying rent to LLC under common control • Will taxable income of LLC be eligible for the 20%? • Guidance forthcoming from IRS www.hbcpas.com 19
- 20. 4. Section 199Repealed • This code section was repealed • Was applicable to C corporations as well • “Domestic Production Activities Deduction” • Had been targeted to manufacturing, growing, constructing, extracting, making, baking, etc. • Was 9% of taxable income for manufacturers • Subject to a 50% of wages limit www.hbcpas.com 20
- 21. 5. Research Credit •Research credit was preserved • In 2022, research expenses need to be capitalized and amortized over 5 yrs instead of being expensed currently www.hbcpas.com 21
- 22. 6. Accounting Methods •263A Uniform Inventory Capitalization Rules • Inventory Method of Accounting/Cash Basis www.hbcpas.com 22
- 23. 6. 263A Inventory •For manufacturers with less than $25 million in revenues – no longer apply 263A • Simplification of the Code • Required separate computation/set of costing records to capitalize additional indirect and administrative costs to inventory for tax • Generally IRS requires you to capitalize more costs than GAAP accounting www.hbcpas.com 23
- 24. 6. Inventory Method/CashBasis • For businesses with less than $25 million in revenues. Previously was $1 million • Potential to only capitalize materials costs • Would not need to capitalize labor or overhead (since 263A would not apply) • But need to follow this method for book accounting as well (lender impact?) • Also potential to use cash basis of accounting www.hbcpas.com 24
- 25. 7. Business InterestLimit • Limit applies only if revenues > $25 million • Except for “tax shelters” • Net business interest is deductible if below 30% of adjusted taxable income • Years: 2018-2021 = EBITDA • Years: 2022 and after = EBIT • Limitation will be much harder to pass in 2022 given depreciation rules • Any interest amount not deductible will carryover to next year www.hbcpas.com 25
- 26. 8. Like KindExchanges • Personal Property • In past gain was deferred • 2018: Trade in allowance considered sales proceeds • Will recognize gain on sale even though no cash received • However, cost of new item may be able to be fully depreciated www.hbcpas.com 26
- 27. 8. Like KindExchanges • Example 2017: • $350K new item, $250K trade in allowance. Net $100K of cash or loan needed = basis to depreciate • No gain recognized www.hbcpas.com 27
- 28. 8. Like KindExchanges • Example 2018: • $350K new item, $250K trade in allowance. Net $100K of cash or loan needed • $250K of gain recognized (assumes $0 basis in old) • But $350K of new basis to depreciate • Same net $100K (watch state depreciation rules though) www.hbcpas.com 28
- 29. Takeaways www.hbcpas.com 29 • Manufacturers havean overall “win” with the new law • Manufacturing demand for new equipment could be hurt somewhat because used equipment is now eligible for bonus depreciation • 199A – be aware of wages to taxable income percentage • Or rely on 2.5% of qualified property plus 25% of wages • Evaluate “entity choice” but be mindful of possible future tax law changes or tax law sunsets • Owner occupied real estate – triple net lease – 199A
- 30. Takeaways www.hbcpas.com 30 • $25 millionis revenue threshold for several items • 263A costs in particular (less than $25 million) • Inventory accounting method (less than $25 million) • Interest expense limitation (more than $25 million) • Be aware of “timing differences” – in particular book vs. tax depreciation. Eventually these will reverse (assets sold) • At what tax rate are you saving today vs. what will rates be in future?
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- 32. Thank You! Glen Birnbaum,CPA [email protected] 201 Clock Tower Drive, Third Floor East Peoria, IL 61611 www.hbcpas.com309·694·4251 32