The recent tax reform legislation provides many benefits for manufacturers in the U.S., who are just coming off the best year of factory activity since 2004. The elements of the legislation that have the most impact on manufacturers’ taxes include:
- Corporate tax rate reduction: Corporate tax rates have been reduced from 35% down to a flat 21% for tax years beginning after December 31, 2017. The US had the highest corporate tax rate in the industrialized world until this change, which brings it down to a level on par with most other Western nations.
- Capital expenditures may be immediately expensed: qualified new and used fixed assets placed in service after September 27, 2017, and before January 1, 2023 may be 100% expensed immediately with provisions that provide for a phase down of expensing for property placed in service through December 31, 2026.
- The R&D tax credit has been retained: this credit was rumored to be on the chopping block during bill negotiations but ended up surviving. Many manufacturers can make use of this credit to decrease their tax bill.
- Overseas profit tax rate reduction: Income made by international manufacturers overseas was previously subject to U.S. corporate tax rates of 35% if the cash was repatriated. The tax reform reduces the repatriation tax rate to 15.5%. This provides manufacturers more incentive to bring their cash back to the U.S. and potentially invest in capital, jobs, or acquisitions.
What might these changes mean to the manufacturing sector? Wall Street Journal chief economics commentator Greg Ip shares his point of view in this video:
Are there any downsides to these reforms for U.S. manufacturers? Possibly. With increased investment and continued expansion in the manufacturing sector, widespread skill shortages may become exacerbated. Accelerated engineering training and skill development will become even more important over the coming years.
A few resources to learn more detail about the tax reform impact on manufacturers: