Tax Cuts and Jobs Act – Impact on Manufacturers & Distributors
Co-authored by Ryan Redleski
As many of you are aware, Congress has approved and the President has signed a major tax reform act. The Tax Cuts and Jobs Act (the Act) was signed into law on December 22, 2017 and provides many tax planning opportunities for Manufacturers and Distributors. Several of the changes are highlighted below. It is important to note that we are still awaiting regulations, additional examples, and more specific information from the government as it relates to many of these items.
- The C-Corporation tax rate has been reduced to a flat rate of 21% for tax years beginning after December 31, 2017.
- For companies that utilize a fiscal year, they will receive the benefit of a blended rate for fiscal years that begin before January 1, 2018.
Alternative Minimum Tax (AMT)
- Corporate AMT has been repealed for tax years beginning after December 31, 2017.
- If a company has any prior year minimum credit carry-forwards, they can be used to offset regular tax until 2022.
- The Section 179 limit has been increased to $1,000,000 and the phase out begins at $2,500,000 for tax years beginning after December 31, 2017.
- The Act puts in place 100% bonus depreciation for all eligible fixed assets purchased (both new and used) and placed in service from September 27, 2017 through 2022.
- The Act allows for a deduction of up to 20% on pass-through income for tax years beginning after December 31, 2017. Please note there are several limitations that apply.
Domestic Production Activities Deduction (DPAD)
- This deduction was repealed for tax years beginning after December 31, 2017.
Research and Development Credit
- The credit is retained; however, taxpayers must capitalize their R&D expenses and amortize over a 5 year period. The old law provided the option of immediate deduction or capitalization.
Net Operating Losses
- For tax years beginning after December 31, 2017, taxpayers can only deduct net operating losses of 80% of taxable income and carry forward the remaining losses indefinitely. The new law does not allow the NOL to be carried back.
Meals and Entertainment Deductions
- The new law repeals deductions for entertainment, amusement and recreation.
- Meals provided to employees for the convenience of the employer are subject to 50% deduction for tax years beginning after December 31, 2017 (formerly a 100% deduction). After 2026, no deduction will be allowed.
- Social or recreational expenses for the benefit of employees (holiday party, company picnic) continue to be fully deductible under the new Act.
Limitations on Interest Expense
- The deduction is limited to 30% of a company’s adjusted taxable income for tax years beginning after December 31, 2017. Any excess is carried forward indefinitely.
- Businesses with average gross receipts for the prior three years of less than $25 million are exempt from this limitation.
- Like-kind exchanges have been limited to real property.
- Section 263A UNICAP will only be required if average gross receipts are greater than $25 million for the three prior years.
- Businesses with $25 million or less in average gross receipts for the three prior years will be permitted to use the cash method.
International Related Items:
Current Year Inclusion – Global Intangible Low-Taxed Income (GILTI)
- Beginning after December 31, 2017, U.S. Shareholders of any Controlled Foreign Corporation (CFC) are required to include their pro-rata share of GILTI.
- Corporate shareholders are allowed a 50% deduction of GILTI through 2025, reduced to a 37.5% deduction beginning in 2026.
Base Erosion Anti-Abuse Tax (BEAT)
- There is a new base erosion minimum tax that applies to certain U.S. Multi-Nationals as a result of the Act for taxable years beginning after December 31, 2017.
- Due to favorable tax treaties, U.S. Multi-Nationals could shift monies to low-tax jurisdictions, through interest, dividends, etc., eroding their U.S. tax base. The new BEAT tax is the Service’s attempt to limit the shifting of income overseas.
Deduction for Foreign Sourced Dividends
- The Act provides for an exemption (Deduction for Dividends Received) that gives a 100% deduction for the foreign source portion of dividends received from certain foreign corporations.
If you are a manufacturing or distribution entity, here are some questions you should be asking. It is important to remember, however, each of these items needs to be carefully considered with your tax advisor.
- Should I consider a change in entity type (for instance, should my entity be a C Corporation vs. an S Corporation)?
- Will I be able to use the cash method of accounting for income tax purposes?
- If I am currently a pass-through entity, what impact will the 20% deduction have?
- Will the changes in deductions allowed for meals and entertainment and interest expense have a major impact on taxable income for my entity?
As seen above, there are several changes to tax law as a result of this Act. Each entity’s situation is different. If you would like additional information on any of the information above or if you have questions in general on the tax reform, VonLehman is here to help.