1. CORPORATE RATE / PASS-THROUGH DEDUCTION
What is in the bill:
Much has been made about the decline in the corporate income tax rate to a flat 21%, and there are also additional changes to the taxation of pass-through entities including partnerships and S-Corporations. The cuts to pass-through entities include a potential 20% deduction from the partner/shareholder’s allocated income, subject to limitations based on W-2 wages paid and the unadjusted basis of the property used in the production of the income.
Potential impact on manufacturers:
Manufacturers that are structured as C-Corporations will enjoy a decrease in the corporate tax rate to 21%. Qualified Dividends that are paid out of the C-Corporation will maintain their preferential treatment at rates of 0, 15, or 20% depending upon bracket of the taxpayer receiving the dividend. Pass-through entity partners/shareholders will generally be able to deduct 20% of their allocated income. The limitations related to W-2 wages appears to be in favor of large manufacturers that pay a significant amount of W-2 wages. The limitation in the bill can be calculated as the lesser of 20% of the allocated income or 50% of the partner’s share of W-2 wages.
Example:
Manufacturing, Inc. is an S-Corporation that manufactures widgets. Manufacturing, Inc. generates taxable income of $100,000 in 2018 and paid W-2 wages of $1,000,000. Shareholder A is a shareholder in the business and is allocated 50% of the 2018 income. The following will show Shareholder A’s income allocation from Manufacturing, Inc. in 2018.
| Partner A’s Income Allocation | $50,000 |
| 50% of Shareholder A’s share of W-2 Wages Paid | $250,000 |
| Deduction Available | $10,000 |
| Income Allocation after Deduction | $40,000 |
Shareholder A’s taxable income from Manufacturing, Inc. under the bill is only $40,000 due to the 20% deduction that is now available. As the 20% deduction does not exceed 50% of Shareholder A’s allocation of W-2 wages paid by the business, the full $10,000 deduction is allowed and reduces Shareholder A’s taxable income.
2. FULL EXPENSING
What is in the bill:
Fixed assets with a useful life of less than 20 years will be eligible for 100% bonus depreciation treatment. Businesses will be able to deduct the full cost in the year a fixed asset is placed in service through 2022, with a phase down in subsequent years. These assets include all property that is new to the taxpayer and will be retroactive to include fixed assets placed in service after September 27, 2017.
Potential impact on manufacturers:
Manufacturers will be able to immediately deduct equipment and furniture purchases in the year purchased. The immediate deduction is available on nearly all property other than real property with a 39-year useful life. This benefit will even impact the 2017 tax year, as qualifying fixed assets purchased after September 27, 2017 will be eligible for full expensing. Another caveat that is a potential boon to manufacturers involves the ability for both new and used property to be eligible for the full expensing treatment. Manufacturers will likely have additional tax deductions when compared to prior years due to this provision. The increased cash flow may allow for additional investment in property and equipment.
3. ACCOUNTING METHODS
What is in the bill: Accounting methods previously denied to certain businesses will become available as the thresholds restricting items such as the cash basis method have been increased. The availability of the cash method for C-Corporations has been increased from businesses with average gross receipts of less than $5 million to businesses with average gross receipts of less than $25 million. Additionally, the availability of the cash method for taxpayers with inventory is increased businesses with average gross receipts of less than $25 million. Businesses with gross receipts of less than $25 million will also be excluded from Section 263a.
Potential impact on manufacturers: Taxpayers with inventory now have more flexibility in being able to use the cash method of accounting for tax purposes, which may prove to be beneficial. Depending on the nature of the business and its cash flows, the use of the cash method may prove to more closely mirror the economics of the business. It is possible that taxable income under the cash method may more closely resemble the cash flow of the business and its capacity to pay taxes.
4. DOMESTIC PRODUCTION ACTIVITIES DEDUCTION
What is in the bill:
The bill repealed Section 199 allowing a deduction for domestic production activities. The DPAD deduction allowed for a 9% deduction on qualified production income which will no longer be available.
Potential impact on manufacturers:
Although manufacturers will miss out on the domestic production activities deduction, they will benefit from the decrease in the corporate rate and pass-through deduction that is available under the bill. The repeal of the DPAD will likely simplify the record keeping burden for manufacturers and may remove some complication from their tax filings.
