At the end of 2017 Congress pushed through the Tax Cuts and Jobs Act, which went into effect at the beginning of 2018. While these changes won’t alter the tax filings done in April 2018 they will affect 2018 filings. Many small business owners are watching these changes closely to see how they will impact them both personally and with regards to their corporate filings. Interestingly the manufacturing sector will be one of the least impacted businesses as a result of these changes. This is largely because manufacturing companies already pay one of the lowest corporate tax rates, and simply there’s not much further down they can go. While most industries, banking and real estate leading the way, will see substantial reductions in their tax bill, manufacturers will see a more modest change.
According to the findings from economists at the Penn Warton Budget Model at the University of Pennsylvania, the average effective tax rate for manufacturers in 2017 was 17.5%. The expectation for 2018 is that this will fall to 10.9%. The effective tax rate being the amount actually paid on profits after deductions and other tax breaks are taken into account. This could potentially increase as the years go by. The current version of the law would allow for tax breaks for capital equipment purchases and money spent on research and development to be reduced in 2022 and expire in 2027. This would significantly impact manufacturing businesses and raise their effective tax rate close to previous levels.
A recent study conducted by the National Association of Manufacturers found that nearly 95% of their respondents were optimistic about their company’s future. More than three-fifths stated that the approval of the tax bill would likely increase their capital spending. These stats are a 20 year high for this survey. Clearly this reflects that the members of the large manufacturing groups are in support of this new tax law. One major reason for this support may be the changes in the expensing of capital equipment. The new law allows for 100% expensing for capital equipment. While this is set to reduce starting in 2022 it does provide some stability for the next 5 years. For the past several years this has been a regular source of anxiety at the end of each year while businesses wait to see if Congress will again approve these tax breaks or not. Thus it’s easy to see why the predictability of this new law is a benefit to business owners. Another interesting addition is the change allowing for used manufacturing equipment to also be part of the capital expenditure depreciation. Previously this had only been available on new equipment purchases but the recent changes state that the equipment simply has to be new to your company but can be a used piece of equipment.
One other interesting change that could affect manufacturing businesses is the addition of the new tax credit for family leave. This currently applies only for 2018 and 2019, but it allows for businesses to get a tax credit for some of the wages paid to employees when they’re out on family leave or sick time. This would apply to C Corporations or pass-through businesses who offer a family leave program or sick leave program and pay their employees at least 50% of their regular wage during that time.
Likely there will be other changes resulting from the Tax Cuts and Jobs Act that will impact your business and of course your tax expert will provide full guidance in navigating these new rules. While things could continue to evolve it initially appears that the manufacturing industry is responding with enthusiasm to these changes, and the expectation is that these funds staying within corporations will result in the addition of new jobs and strengthening of the economy.