As a result of the many responsibilities they occupy, professionals in the Manufacturing and Distribution Industry are regularly faced with a multitude of challenges. Talent shortages and cybersecurity are just a few of the problems facing the industry. Likewise, there is an abundance of accounting and tax hot topics currently impacting manufacturing and distribution businesses. This article evaluates some of the more impactful challenges for manufacturers in 2019.
Sales and Use Tax
In June, 2018, the U.S. Supreme Court issued a ruling in the case of South Dakota v. Wayfair. This case has had a major impact on the manufacturing and distribution industry, in particular, as it has turned the focus for sales and use tax nexus from a physical presence standard to an economic presence standard. Companies need to closely review the states they are shipping into, as it relates to the dollar amount and number of transactions conducted, in order to review their sales and use tax nexus footprint. Repercussions may include additional registration requirements, additional compliance filings, and potentially expanded technology needs. While many manufacturing and distribution companies do not feel they will be affected by this ruling, as they don’t often collect significant sales tax dollars based on who they’re selling to, it is critical for these entities to, at a minimum, review their exemption certificates collected to ensure they are both current and easily accessible.
New Accounting Standard – Revenue Recognition
The new accounting standard for revenue recognition is finally here! This new standard is intended to provide an industry-neutral revenue recognition model to increase comparability across companies and industries. The guidance sets out a five-step approach which includes identifying the contract, separating the performance obligations, determining transaction price, allocating the transaction price, and finally, recognizing revenue. Nonpublic organizations should apply the new revenue standard to annual reporting periods beginning after December 15, 2018. This standard is expected to have a significant impact on some manufacturing and distribution companies, while, for others, it will mainly result in several more footnote disclosures.
New Accounting Standard – Leases
FASB has also implemented a new accounting standard that will change the way leases are accounted for. This standard mandates that certain assets, along with their lease payments, must be capitalized and shown on the balance sheet, not expensed when paid. It will be very important for manufacturing and distribution entities to start analyzing their current leases and accumulate the necessary information to adopt this standard. This change may have an impact on your company’s bank covenant calculations; therefore, it will be important for you to determine the impact of this standard on covenants and discuss the impact with your bank.
Tax Cuts and Jobs Act (TCJA)
In late 2017, the most significant federal tax legislation since 1986 was enacted. As a result, major changes for manufacturing and distribution companies include the following:
- For years, the nominal corporate tax rate of the U.S., 35%, has been among the highest of any OECD member, for which the average is 22.5%. For tax years beginning in 2018 or later, the TCJA reduces the U.S. tax rate to 21%, with a stated goal of attracting foreign investors, reducing the incentive for U.S. corporations to shift capital abroad, and creating more U.S. based jobs.
- International taxation has also changed, with the goal of keeping Intellectual Property in the US and shifting the tax to where the economic substance lies. The TCJA required U.S. based companies to pay tax on the estimated $3 trillion they’ve stashed abroad since 1986, commonly called Deemed Repatriation or Transition Toll Charge. Repatriation is a one-time tax which sets a rate of 15.5% on cash and 8% on non-cash or illiquid assets. Payments can be made over eight years. Previously, companies paid the old corporate rate of 35%, but only if they brought the money back to the U.S. The 2018 and forward tax is Global Intangible Low-Taxed Income (GILTI), however the tax can apply to income that is neither intangible nor low taxed. 50% deduction applies, however to C Corporations shareholders only.
- For qualifying property placed in service in tax years beginning after December 31, 2017, the maximum Section 179 deduction was permanently increased to $1 million, and the phase-out threshold was increased to $2.5 million. In addition, first-year bonus depreciation has become more generous. For qualified property placed in service between September 28, 2017 and December 31, 2022, first-year bonus depreciation on qualifying new and used property increases to 100%. There is a 20% annual phase-down in the following years. “Qualified property” generally includes computer software and tangible property with a recovery period of 20 years or less.
- For tax years beginning in 2018 through 2025, the TCJA establishes a new deduction based on a non-corporate owner’s qualified business income (QBI). The deduction generally equals 20% of QBI, subject to certain restrictions. This break is available to individuals, estates, and trusts that own interests in pass-through business entities engaged in a non-specified service trade or business or whose income, before the deduction, is less than a threshold amount ($315,000 in the case of joint filers). There are also potential limits on interest deductibility that have to be considered. These and other changes will affect decisions on whether to run a business through a partnership, C Corporation, S Corporation or sole proprietorship.
Kentucky House Bill 487
In response to the federal government’s Tax Cuts and Jobs Act, the Kentucky General Assembly issued House Bill 487 (HB 487), which was passed in April, 2018. As a result of this bill, some of the key changes that impact manufacturing and distribution companies are as follows:
- A non-refundable income tax credit for property taxes paid on inventory has been put into place. The credit starts at 25% of the tax paid for 2018 and increases to 100% of the tax paid by 2021.
- Similar to the Federal Tax Cuts and Jobs Act, the bill has repealed the domestic production activity deduction.
- Kentucky did not adopt the deduction for qualified business income of pass-through entities as provided for in the Federal Tax Cuts and Jobs Act.
- The apportionment factor calculation on the return will change from a three-factor system to a single sales factor for the sale of tangible personal property.
Form I – 9 Audits on the Rise
During 2018, the federal government announced they were planning to increase I-9 audits by the Immigration and Customs Enforcement (ICE) arm of U.S. Citizenship and Immigration Services. ICE audits involve a rigorous evaluation of the form to ensure it has been filled out to their exact instructions. We recommend that employers proactively implement best practices with regard to the completion, retention and storage of their I-9 forms. Additionally, every employer should conduct regular voluntary Form I-9 self-audits.
If you have any questions about the above topics, or anything else VonLehman can assist you with, please do not hesitate to reach out to your VonLehman Manufacturing and Distribution Group today.
