Tax Reform Provisions Affecting Manufacturers

Written by Warren Averett, William Dow and Clint Freeman on December 6, 2017

The House and Senate have released their proposed tax bills, and each is quickly making it through their respective legislative body. There are still unanswered questions, but there are several key provisions that will likely be retained (in some fashion) as the House and Senate reconcile their differences.

  • Reduction of Tax Rates

Manufacturers operating as C corporations will benefit from the tax rate decreasing from 35 percent to as low as 20 percent. Congress has recently indicated that they may consider a rate closer to 22 percent to help pay for other items. To put it in perspective; each one percent drop in the rate is about $100 billion over a ten year period. The White House has indicated that they will not accept the higher rate, so this will likely be a main point of contention. Additionally, the tax proposals call for the elimination of the corporate alternative minimum tax (AMT).

Manufacturers operating as pass-through entities will also benefit from either a reduced rate on business income or a deduction of some amount. The intent is to allow business income that is not in corporate form to receive a rate reduction. However, the Senate and the House of Representatives are, at this time, still trying to decide exactly how this reduction will play out.

  • Change in Equipment Expensing

The tax proposals call for an increase in the bonus depreciation from 50 percent to
100 percent for five years (through 2022). Previously 50 percent, this incentive will be applied to new and used qualified property as long as it was not used by the taxpayer before the taxpayer acquired it. After the five-year period, regular depreciation rules apply.

Manufacturers can also benefit from the increasing of “Section 179” allowance from $500,000 to $1 million (under the Senate’s proposed changes) or $5 million (under the House of Representative’s proposed changes) for a five-year period.

  • Change in Tax Treatment of Inventory

The gross receipts exemption from the uniform capitalization rules is expected to be increased under both bills. The base is increased from $10 million in gross receipts to $15 million (Senate) or $25 million (House). This increase will allow more manufacturers to expense more items rather than having to add to their ending inventory.

  • Miscellaneous Provisions

There are also many other provisions that can impact manufacturers. Some of the more noteworthy are the proposed limitations on interest deductions, increasing the gross income limit for using the completed-contract method of accounting, elimination of the deduction for entertainment expenses, limiting the use of net operating losses to 90 percent and the repeal of the domestic production activities deduction.

There are many changes that are still undecided as of this moment. Once the tax bills go to Conference Committee, we should get a better idea of how these provisions will play out. Our Tax Reform Committee is working to track the latest happenings here.

 

Related Insights

Top