by Michael S. Neubauer, CPA, CVA, MBA McGill, Power, Bell & Associates, LLP

The recently passed Tax Cuts and Jobs Act (“Tax Act”) is the most significant tax reform our country has seen in over 30 years. While most of the provisions don’t apply until tax year 2018 (which won’t be filed until 2019), it is essential to be aware of them now so strategic decisions can be made throughout the year with this new tax law in mind. The number of changes resulting from the Tax Act cannot be understated. Below is a summary of a few items that will have a significant impact on manufacturing businesses and their owners.

For those doing business as a C Corporation, the federal corporate tax rate has changed from a graduated rate structure to a flat rate of 21%, representing a tax cut for corporations that have taxable income exceeding approximately $91,000. Additionally, the alternative minimum tax for C Corporations has been repealed.

If you aren’t doing business as a C Corporation, don’t worry, the new tax law has provisions for you as well. In addition to reduced individual tax rates which saw the top rate drop from 39.6% to 37%, the Tax Act also allows for a deduction generally equal to 20% of “qualified business income,” which includes income from partnerships, S Corporations, LLCs, and sole proprietorships. There are several limitations associated with this deduction, as such, careful planning will need to be done in order to attempt to maximize this benefit.

For those companies that are in need of purchasing capital equipment, the Tax Act increases the maximum amount that can be expensed under Code Sec. 179 to $1 million, subject to certain limitations. This deduction has been expanded to also include certain improvements made to nonresidential real property after it was first placed in service, including such items as roofs, HVAC systems, and alarm systems, among others. The Tax Act also expands bonus depreciation to allow a 100% first-year deduction for qualified new and used property acquired and placed in service after September 27, 2017 and before 2023, after which the bonus depreciation begins to be phased down. Between these two provisions, many equipment acquisitions will now have the potential of being completely expensed when placed in service.

As is to be expected, not all changes are beneficial. One example is the 9% (6% for certain oil and gas activities) Domestic Production Activities Deduction, which has been repealed for tax years beginning after 2017.

Another significant change is the elimination of the 50% deduction for business related entertainment expenses, which means that these expenses are no longer deductible. The entertainment expenses that fall into this category have been expanded to include meals provided on the employer’s premises.

It will take several years before we are able to assess the overall impact that this tax reform has on both the local and national economy. In the meantime however, provisions of the Tax Act such as those mentioned above can and will be utilized by manufacturers to ensure their continued success into the future.

Michael Neubauer is a partner at McGill Power Bell & Associates providing tax, consulting, and financial reporting services with an emphasis on the manufacturing sector.

Side Note: NWIRC will present ‘Tax Reform: What It Means for Businesses and Business Owners’ a program on tax reform and R&E tax credits featuring McGill, Power, Bell & Associates on April 24, 2018 in Meadville. Click here for details.