How Manufacturers Will Benefit from the 2018 Tax Reform
The Tax Cuts and Jobs Act, abbreviated as the 2018 tax reform, is the largest change to the tax code since the 1986 tax bill. Several key provisions benefit small and large manufacturing businesses. Of the sweeping changes made to the tax code, the R&D credit remains the largest tax savings tool at manufacturers’ disposal but here’s how the law changes expanded the benefit.
Permanent Reduction to Corporate Tax Rates
Corporate income taxes are no longer graduated like personal income taxes and now have a flat tax rate of 21%. Unlike the personal income tax provisions which will sunset in 2025, this reduced corporate tax rate is permanent. The corporate alternative minimum tax (AMT) has also been repealed.
Manufacturers have benefited from the domestic production activities deduction which has now been repealed. However, there’s a new personal deduction for owners of pass-through businesses like S corporations. Married taxpayers filing jointly with total taxable income between $315,000 and $415,000 and other taxpayers with total taxable income between $157,500 and $207,500 may qualify for this deduction.
Bonus Depreciation and §179 Increase
Businesses can immediately deduct 100% of the costs of certain business assets, like machinery, through 2022. This amount will be phased out by 20% every year over four years. Property no longer has to be new, used equipment now qualifies.
Up to $1 million can now be expensed under §179 with the phaseout range beginning at $2.5 million, and the amount will be indexed for inflation in 2019 moving forward. Eligible items for §179 treatment now include improvements to nonresidential real property such as heating and air conditioning systems.
Increased Eligibility for the R&D Credit
The R&D Credit, now a permanent part of the tax code, is open to more manufacturers than ever before due to the above changes. This credit applies to research, development of new products, and experimentation in existing production processes to eliminate technological uncertainties. It is a predominantly wage-based credit based on amounts paid to qualified employees in addition to supplies used in R&D and contract research expenses. With manufacturing processes constantly evolving, R&D efforts do not need to be successful in order to claim this generous tax credit.
Research and experimentation deductions will also require expenses incurred after December 31, 2021 to be amortized over five years which incentivizes hiring more workers to take advantage of the credit instead.
With the reduction in corporate tax rates, the net R&D credit increases by default due to needing to add back less. This provision was intended to prevent a double benefit for R&D expenses. Since you can make an election to reduce by the product of the R&D credit and maximum corporate tax rate, an example R&D credit of $100,000 equates to $65,000 under 2017 maximum tax of 35% but $79,000 under the new 21% flat rate.
With the 2018 tax year about to come to a close, it would be a prudent time to assess the new tax laws and expanded benefits available to manufacturers. Contact us today to set up a consultation.
Would you like to see if your business qualifies? Neil Beeman is our partner in charge of our Research and Development department. He has helped many of his manufacturers benefit from these credits.
Please feel free to email Neil Beeman at: firstname.lastname@example.org or call our office at: 916-774-4208 and ask for Debra Griffin to schedule an appointment with Neil.