A Cold Day in Hades
Hell froze over and pigs flew in Washington, D.C.!
After at least five years of fits and starts, Congress sent President Trump the Tax Cuts and Jobs Act, the first major tax legislation in 30 years. While manufacturers in general, and forgers in particular, did not get everything they’d hoped for, they did get a number of provisions they had been supporting for years.
The Forging Industry Association had been lobbying for years for a lower corporate tax rate, an equivalent pass-through rate, full expensing for equipment and the retention of the Last In-First Out (LIFO) accounting method. We achieved all of those goals.
Here’s a summary of the major business changes effective in 2018 (unless otherwise noted):
• A permanent corporate rate of 21% with no corporate alternative minimum tax (AMT).
• For pass-through entities (LLCs, partnerships, S corporations), a reduction in the top individual rate (down to 37%from 39.6%) and a 20% deduction for manufacturers’ business income. This deduction is subject to a limit based on the greater of 50% of W-2 wages paid in your business or the sum of 25% of W-2 wages plus 2.5% of the basis of your depreciable property. Note that the bill also repeals the “Pease” limitation on itemized deductions. Most analyses of this method place the effective tax rate on most business income for pass-throughs at about 29% when all the deductions/calculations are made. While not the same as the new 21% corporate rate, it’s probably as close as we could hope for.
• Individual AMT exemptions and phase-outs increased significantly.
• Estate Tax exemption doubled for 2018 to over $11 million.
• Full expensing for property acquired between Sept. 28, 2017 and Dec. 31, 2022. Thereafter, the bonus depreciation percentage decreases by 20 points per year, phasing out entirely by 2027. The benefit is extended to used property as well.
• Section 179 expensing cap raised to $1 million with a phase-out starting at $2.5 million.
• Section 199 domestic manufacturing credit repealed.
• Net Operating Loss (NOL) carrybacks eliminated while providing indefinite carryforwards, limited to 80% of taxable income.
• Retention of LIFO accounting method.
• R&D tax credit is made permanent, but the bill changes the treatment of deductible research and experimental costs starting Jan. 1, 2022. After that date, these expenses must be amortized over five years.
• Interest deductibility is capped at 30% of EBITDA for four years and 30% of EBIT thereafter.
• The adoption of a territorial tax system with anti-abuse rules and a base erosion anti-abuse tax (BEAT) at a standard rate of 5% of modified taxable income over an amount equal to regular tax liability for the first year, then 10% through 2025 and 12.5% thereafter. This will exempt U.S. corporations from U.S. taxes on most future foreign profits; prevent shifting profits outside of the U.S.; set an alternative minimum tax on payments between U.S. corporations and foreign affiliates; and limit the shifting of corporate income through transfers of intangible property, including patents.
• Deemed repatriation of currently deferred foreign profits at a 15.5% rate for liquid assets (cash) and 8% rate for earnings reinvested in hard assets, with an eight-year window to pay the tax.
It will take months, if not years, to determine exactly how the new tax law will affect manufacturing, and the results will vary from industry to industry and company to company. There will no doubt be “technical corrections,” because anytime Congress does something this comprehensive this quickly gremlins find their way into the fine print. And there is already talk of a “tax extenders” bill in 2018 to deal with some issues that didn’t make it into the comprehensive bill.
As always, FIA will be part of that process, working to make sure that the U.S. forging industry’s concerns are known to lawmakers. In fact, it’s not too early to put April 17-18 on your calendars – that’s when FIA will hold its annual Lobby Day in Washington, D.C.