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What the tax reform bill means for U.S. manufacturing

Posted by IndustryNet on Tuesday, January 2, 2018


how tax reform will impact manufacturingOn December 22nd, 2017 President Trump signed a monumental tax reform bill into law shortly after it passed both the Senate and House. The sweeping bill represents the largest tax overhaul in 30 years, hailed by the president as an “Incredible Christmas gift for hard-working Americans.”

We’ve heard a lot about how the Tax Cuts and Jobs Act will affect individuals and the breaks it affords to corporations, but what about hard-working American manufacturers?

For the most part, it looks like the bill will have a positive impact both on corporations and on the 27 million small businesses currently active in the U.S. Manufacturing, especially, could stand to benefit, with lower costs for capital expenditures potentially spurring investment and increasing global competitiveness.

The National Association of Manufacturers’ recent Manufacturers’ Outlook Survey showed more than half of businesses responding felt tax reform would cause them to increase capital spending, hire more workers, and increase employee wages and benefits.

Yet, another study shows only 14% of U.S CEOs planned to make significant capital investments due to tax reform.

Either way, the recent tax reform bill will undoubtedly have a major impact on U.S. businesses, particularly those in the manufacturing sector. Here are some of the key pillars of the bill expected to influence U.S. manufacturing in the years ahead.

9 ways tax reform will impact U.S. manufacturers

1. Reduces the corporate tax rate:

Currently, the corporate tax rate is at a maximum of 35%. The new law will bring that rate down to a flat 21% (25% for personal services corporations). The administration and some economists expect this to jump-start the economy, spurring wage and job growth and encouraging investment.3DPrintingCompaniesMakerBot

The Tax Foundation, for instance, estimates a 1.7% increase in GDP as well as a growth in wages of 1.5% and 339,000 new jobs as a result of this bill. Others call it overly optimistic to assume corporations will invest a tax windfall.

2. Reduces the tax rate for “pass through” businesses:

This allows sole proprietorships, S-corps, and partnerships a 20% income deduction, limited to 50% of wages paid by the business.

The rate only available to “pass through” businesses in certain industries, however. Service-oriented “pass through” businesses such as legal or financial services, for instance, will not be eligible for the lower rate, but manufacturers will.

3. Repeals the Alternative Minimum Tax (AMT):

The reduction in corporate tax rate would have caused many companies to be subject to the Alternative Minimum Tax. This bill, however, completely eliminates the AMT.

4. Expedites business expensing of certain investments:

This allows a business to write off a capital investment immediately rather than incrementally over the life of the asset. This could help fuel manufacturing expansions by making it more cost-effective to purchase new machinery and property.

5. Curtails interest expenses:

The new bill will limit interest deductions to 30% of the business's adjusted taxable income. This appears to be an effort to curb corporate debt.

6. Preserves the Work Opportunity Tax Credit, and a number of other incentives:

Early versions of the bill sought to repeal the WOTC, which allows businesses to claim a tax credit for hiring and retaining employees from specific target groups, such as veterans and SNAP recipients. The final bill preserves this credit, along with the research & development credit; new markets tax credit and exemption for private activity bonds.

7. Taxes overseas profits:

Billed as an effort to repatriate profits stored overseas, this hits corporations with a 15% tax on offshore cash assets and an 8% tax on non-cash assets.

WillistonNorthDakotaOilFieldOnRigSite(5894057593)8. Repeals the Domestic Production Activities Deduction (DPAD):

Enacted in 2004, this deduction was intended to boost U.S. exports by imparting the deduction to domestic manufacturers after the World Trade Center eliminated a key tax break to exporters in 2002.

However, the deduction has been criticized as being too complicated and its definition of eligible businesses too loose. Further, the reduction in overall tax rate is expected to compensate for any losses attributed to the elimination of the credit.

9. Opens up Arctic National Wildlife Refuge for oil drilling and also preserves credits for renewable energy:

Oil/gas and related companies stand to benefit from the bill’s provision which allows for oil drilling in previously inaccessible Arctic lands.

Earlier version of the bill also sought to eliminate essential renewable energy credits utilized by numerous companies in the wind, solar and other alternative energy industries. The final version of the bill, however, preserves these credits providing continued fuel to the rapidly expanding alternative energy sector.

Related articles:
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U.S. manufacturing activity weakens, but remains near historic high

 

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