Tax reform has businesses of all kinds contemplating how it will affect them. In a sense, it’s a great catalyst to reevaluate your business in general to ensure your strategies and processes are maximizing outcomes and revenues. Below are a few changes in tax reform that may impact you specifically as a manufacturer.
INCREASED FIXED ASSET EXPENSING
100% bonus depreciation will replace the 2017 50% rate that was going to be phased down over the next few years. This change begins for assets placed into service on or after 9/27/17 through 2022. A phase down of bonus rates begin in 2023 and end in 2026. This deduction is now available to used property, as well as new – which is a change from the previous law.
The Section 179 deduction that is a maximum $500k expense for qualifying property for tax year 2017 will be a maximum of $1M beginning in 2018. Also, the $2M phaseout for 2017 will increase to $2.5M beginning in 2018. The $25,000 SUV limitation still applies. The definition of qualifying property for the deduction beginning in 2018 will now include certain qualifying real property, such as improvements to nonresidential property like roofs, HVAC property, and fire/alarm/security systems. This provision does not expire like the bonus depreciation rules do.
UNICAP/ACCOUNTING METHOD CHANGES
UNICAP is short for the Uniform Capitalization rules found in Internal Revenue Code § 263A. It requires taxpayers to capitalize, rather than expense, a portion of costs associated with the production of inventory. Exemptions to UNICAP did exist pre-tax reform, however, now they cover many more businesses.
For tax years beginning after December 31, 2017, taxpayers who have annual gross receipts of $25 million or less during the preceding three years are now generally exempt from UNICAP. As mentioned, the old rules had exemptions to UNICAP as well, such as the exemption for resellers with gross receipts less than $10 million, but very slim chance of escaping if you were a producer (i.e. manufacturer). The exemptions that applied under old laws unrelated to gross receipts are retained under the revised provisions.
So, while larger businesses with inventories may still be subject to UNICAP, a nice break for the ‘small’ guys is now increased from $10 million to $25 million of gross receipts, and expanded to include manufacturers as well as resellers in that test. This $25 million test also allows more taxpayers to choose cash method over accrual, as well as the ability to simplify accounting for inventories. If you find yourself in the category of taxpayers now exempt from UNICAP, or desire to switch from accrual to cash method, you’ll need to consider this an accounting method change and file appropriately. Regulations will set the tone on how to implement.
DPAD (SECTION 199)
The Domestic Production Activities Deduction (DPAD) was a tax incentive for manufacturers and the like, however, this deduction has been repealed for taxable years after December 31, 2017. It shouldn’t be too big of a hit with the advent of Section 199A (the passthrough business deduction) – a similar incentive, but for passthrough businesses that includes many more industries than the old DPAD.
LIKE-KIND EXCHANGES (SECTION 1031)
If you are used to trading in your equipment, know that the gain will no longer be deferred after December 31, 2017. There is an exception if the like-kind exchange was already in place, so those may still be finished up according to the old rules. Like-kind exchanges are still available for real property.
INTEREST EXPENSE LIMITATIONS
Under pre-tax reform law, businesses could fully deduct the interest paid to keep their business going. However, under tax reform, some businesses will be faced with a limitation of interest expense capped at 30% of earnings, with a carryforward of unused amounts. There is an exemption to this limitation for businesses with annual gross receipts under $25M, and for those with floorplan financing (auto manufacturers). If you’re highly leveraged and high annual receipts, this may hurt a little . Weigh your impact, and consider options other than financing if needed.
Each organization will be impacted differently by tax reform, it is important to consider your unique situation when reviewing tax law changes. TD&T can help you review the full effect tax reform may have on your business, help minimize negative impacts, and maximize new opportunities. Give us a call for a consultation!
This article is not intended to provide specific tax advice and does not discuss all aspects of tax reform. Please consult your tax advisor or contact us to see how these rules may impact your unique situation.