It has been three decades since we have had bold new tax reform. The last time this level of change occurred was in 1986, which was under President Ronald Reagan. The new tax reform bill could bring around change for manufacturers, and in a very positive way making life easier on American manufacturing companies. America is known to have the highest tax rates when it comes to corporations as well as pass-through entities. With this new legislation, it would be able to provide tax breaks for many manufacturers as well as allowing them to reinvest more money into their companies. This would allow them to grow as well as create new jobs for the local area. This could really start the economy booming.
One of the proposed legislation that would greatly impact the industry is the immediate expensing of equipment. One area of this new tax plan would allow businesses to expense 100% immediately of capital expenditures. The current corporate tax rate is at 35%. With the new legislation, it would reduce that number to 20%, a sizeable drop and very beneficial for many manufacturers. There are also areas that remain untouched, but that is a good thing. One credit manufacturers have been able to take huge advantage of is the research and development, this credit incentivizes manufacturers to stay competitive.
Now the bill isn’t without some caveats. In order to give a little, it had to take a little as well. Some deductions that would be going away include the work opportunity tax credit, new markets tax credit and limits interest deductions for business making more than $25 million in revenue. The work opportunity tax credit allowed employers a credit for hiring veterans and individuals from target groups, this has been averaging about $1 billion in tax credits each year for business. The new market tax credit incentivized private investors to spend money in low-income areas. A limit on interest deductions would impact manufacturers that are highly leveraged in order to fund capital expenditures.
The National Association of Manufacturers fields a survey of its members. In a most recent survey, 64% of responders said they would expand their business when the new tax reform is finally enacted, 57% said they would hire more workers and 52% reported that they would increase wages and benefits. Optimism is very high right now, which is a great thing for the economy and manufacturers around the country.
If we do see tax legislation pass this year, tax rates will be lower for companies starting in 2018 and the deductions would be eliminated for that year as well. Manufacturers should take advantage now of any and all deductions that will be disappearing, as well as trying to defer as much income to the following year, for this will be when the tax rates are lower.
The opposition for this tax reform has made note that this will add to the deficit, approximately $1.4 trillion dollars which would need to be made up elsewhere. They also state that this form of trickledown economics has never worked before. It has been said, that if the corporations received tax breaks, as well as the wealthy, the extra income should trickle down and be better for all involved. In the past, through previous tries to see if this kind of strategy works it has been proven to not work as great as some would say. Between the years of 1979 to 2005, after tax household income rose 6%, which is really good, but the top 1% saw their income triple, and increased by 80%. Only time can tell what these new tax cuts mean for the working American people as well as manufacturers.
Article contributed by Bradley Melnyk