The Tax Cuts and Jobs Act of 2017
that President Trump signed into law this past December was the most comprehensive overhaul of the US tax code in over 30 years. The law contains significant changes to both individual and corporate tax rates. There is little doubt the law will impact all Americans in some manner or another, but what impact will the tax law have on the material handling industry?
Corporate Tax Rate
Prior to the new law taking effect, the United States had the highest corporate tax rate of all advanced economies topping out around 35%. The new law lowers this rate to a flat 21% for all corporations. This is a significant reduction, and one can only hypothesize that it will help U.S. corporations by allowing them to better compete on the world stage. The change also aims to encourage companies to manufacturer their goods in the U.S. which should be music to the ears of those of us in the material handling industry.
Pass-Through Company Tax Rates
For companies not setup as corporations, but rather as partnerships, LLCs, S Corporations or Sole Proprietorships, the new law also provides relief. The main difference between corporations and pass-through companies is that the owners of pass-through companies pay taxes from business income and expenses on their personal tax returns. This is particularly impactful for those in the material handling industry because many third-party logistics (3PL) companies are structured in this manner. In an effort to reduce the burden, the new law significantly reduces most individual income tax rates. In addition, the law also contains a 20% deduction on “qualified business income”. One estimate indicates that pass-through companies can expect a decrease from an effective income tax rate of 40% down to around 30%.
The new law also contains a provision which allows companies to fully deduct the cost of equipment purchases within the first year the equipment is placed into service. A simple, high level example of how a company potentially could benefit from this new, 100% expensing, provision is as follows:
A food manufacturing company purchases a new oven for $1,000. After the new oven is put into service, the company can deduct 100% of the cost of the oven from their taxes. Assuming their tax rate is 21%, this would result in an additional tax savings to the company of $210.
The new law contains a provision which allows companies to claim the new, 100% expensing deduct for equipment which the company placed into service after September 27th
2017. This is one of only a few items that applies to 2017 purchases, and companies should evaluate equipment that was placed into service in the fourth quarter of 2017. The potential tax savings from these deductions could allow for additional investments in 2018.
Tax Credit to Companies for Family Leave or Sick Leave
One provision of the law that many may not be aware of is a new tax credit for family leave and sick leave. If a company has a family leave program or a sick leave program in which they pay their employees at least 50% of their regular wage, that company can receive a tax credit for a portion of their wage when an employee is out on family leave or sick time. That would apply to both corporations and pass-through businesses.
Limitation on Interest Deduction
The new law introduces a limitation on a company’s ability to deduct interest, and caps it at 30% of a company’s EBITDA (earnings before interest, taxes, depreciation and amortization). What this means is if a company is a highly-leveraged manufacturer that has a lot of debt, that company’s ability to deduct interest may be limited, thus increasing the amount of tax a company would pay. There had not been a limitation in the past. Now there is one. So, this is something to be mindful of as it could impact a company’s ability to invest in new equipment.
Tax incentives Not Changed by the New Law
Although the new tax law did make significant changes, there are a couple items that are important to those in the material handling industry that were not modified. One is the LIFO (last in, first out) inventory method that many manufacturers utilize. Essentially LIFO provides a tax benefit to companies that have rising costs of goods. Another provision the law did not modify is the research and design credit, which allows for tax relief to companies that develop new products and processes.
Impact of the New Tax Law on Material Handling
The subject of the new tax law is a divisional one. With the US economy growing at a rate of around 2%, one would believe the tax reductions and incentives contained in this new law would only have a positive impact. However, the material handling industry has been on fire and far outpaced the rest of the economy in recent years.
[caption id="attachment_13362" align="aligncenter" width="675"]
Credit: Prestige Economics and MHI.org[/caption]
For example, according to CEMA, orders for conveyor equipment rose by over 40% in 2017 compared to 2016. Largely fueled by system orders that allow companies to adapt to the growing number of ecommerce orders
, the material handling industry shows no signs of slowing down any time soon.
So, will the new tax law impact material handling? I believe the answer is yes, but the exact impact is unknown. One must believe that companies of all sizes will look to reinvest their tax savings into their businesses. While it may be difficult for the material handling industry to grow any faster as it pertains to the distribution market, the manufacturing sector could take off as manufacturers look to open new facilities or expand existing plants in the U.S.
There is no predicting the future and there are no certainties, but if it is possible for the material handling industry to get any hotter, the new tax law could be like tossing gasoline on the fire.
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