Gauging Tax Reform’s Effect on Mass Production

Gauging Tax Reform’s Effect on Mass Production

It only takes nine letters to spell a little phrase like “tax reform,” but its impact is likely to be pretty important for basically every major industry category. Indiana manufacturers, whose operations make up about a third of the state’s total economic output, are paying particular attention to the ways in which these reforms are going to translate into real-world changes to their bottom line.

With good reason, too, given the level of economic activity the sector generates. The output of Indiana manufacturing is roughly $100 billion a year and approximately 516,900 people are employed by the sector, close to 17 percent of the state’s workforce, according to the Center for Manufacturing Research, the data arm of the National Association of Manufacturers. Almost every one of the firms in this industry have unique needs and business models, meaning the specific ways in which the new reforms will affect their taxation will differ significantly between companies.

Obviously, the focal point is the reduction of the top corporate tax rate from 35 to 21 percent, but it’s unclear to what degree that factor alone will benefit Indiana companies. Many Hoosier manufacturers are small operations that don’t fit into the C corporation category this requires. Also, many current C corporation manufacturers don’t actually pay the full 35 percent. According to BDO U.S.A., LLP, a national accounting and consulting firm, the effective actual tax rate for manufacturers has historically averaged 22 percent. This still represents a small win, but not as eye-catching as the full reduction that garnered all the headlines.

Smaller operations (referred to as pass-through entities or S corporations) received a tax reduction too, up to a 20 percent deduction on qualified business income. It’s a bit more complex than that, but this reduction for pass-through entities helps keep smaller firms on par with C corporations in terms of the lower taxation they’ll incur this year.

One of the more important areas of reform many manufacturers might not yet be aware of are the new options for reducing taxable income. There are two ways this can happen with the changes that have come to bonus depreciation and tax code Section 179 depreciation. Under the first part, manufacturers can place new “qualifying property,” or equipment, into service and expense 100 percent of the cost. This can even include used property. Under Section 179, the amount of depreciation a manufacturer can claim on qualifying property has been increased to $1 million. This applies to any tangible property but not structures.

Long story short, companies will be able to reduce their taxable income and hopefully increase their capital spending and investments. This could potentially lead to new jobs, new products, or more. However you slice it, the reductions have manufacturers feeling optimistic.

“We believe the new tax reform will encourage businesses to invest and potentially grow. Specifically, the new rules that allow for the immediate deduction of capital investments really make it attractive for expansion and growth capital. This growth should increase employment opportunities which allows everyone to benefit,” said Ron Schmucker, CFO of Lerman Enterprises, a South Bend-based firm that operates the Steel Warehouse, Lock Joint Tube, and SFI family of companies.

“We are not currently a C corporation, so the lower corporate tax rate does not impact us right now, but we are considering changing our structure in the future. We are currently analyzing that situation,” he added.

Another area of Indiana mass production is reporting optimism about the new tax changes: the Hoosier agricultural sector. The Purdue University/CME Group Ag Economy Barometer, which provides monthly measures of the health of the agricultural economy, recently reported producers were more optimistic about their industry in part due to the Tax Cuts and Jobs Act.

Surveyed producers were asked to rate the likely impact on their farming operations, as well as their families’ tax burdens. Nearly half of all producers said they expect the tax bill to be beneficial to their operations. Conversely, 19 percent said they expect the tax bill to have a negative impact on their farming operations. The remaining 35 percent gave a neutral response.

When it came to producers’ expectations for their families’ tax burdens, 43 percent said they expect a decline, 18 percent expect an increase, and 40 percent said they expect their families’ tax burdens to stay about the same.

“It’s possible the 40 percent of respondents expecting no changes in their taxes and the 35 percent who provided a neutral rating could reflect uncertainty regarding the specific content of the tax bill and the fact that IRS regulations implementing the tax bill have yet to be issued,” said James Mintert, director of Purdue University’s Center for Commercial Agriculture.

In any case, many manufacturers throughout Indiana and the rest of the nation are reporting positive feelings toward the new reforms despite some uncertainty about the way they’ll actually translate into hard dollars. Though the answers will vary between different companies, they’re projected to be economically positive for the industry overall. Still something to celebrate.

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