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18
Door & Window Market www.dwmmag.com
T
he tax-reform bill that was
signed into law at the end of
2017 has many attractive pro
-
visions for companies in the
door and window industry.
For the big players, the corporate
tax rate is slashed from 35 percent to
21 percent. Smaller companies set up
as so-called pass-through” businesses
get to deduct 20 percent of the first
$315,000 of earnings. (“Pass-throughs
represent about 95 percent of the 26
million businesses in the U.S.)
But one provision of the Tax Cuts
and Jobs Act could have a long-term
effect on every manufacturing busi
-
ness in the industry, regardless of size.
The law allows companies to
write off the full cost of
new equipment for the
next five years. Before,
the system only allowed
the write-off off over an
extended period of time
through depreciation and
amortization deductions.
Additionally, the popu
-
lar Section 179 deduction
for capital expenses will rise
from $500,000 to $1 million, with
a limit of $2.5 million. (Section
179 of the IRS Code allows small
businesses to take a depreciation
deduction for certain assets in year
one, rather than stretching them over
a longer period of time.)
Together, these changes
could mean a lot more business
in 2018 and beyond for compa
-
nies that sell machinery. Overall, U.S.
orders for manufacturing equipment
are expected to rise 12 percent in
2018, according to the Association for
Manufacturing Technology.
“Yes, there have been discussions
and increased interest not just due
to this part of the tax code, but also
the lowering of the corporate rate
has made investing more attractive
as well,” says Morgan Donohue, the
vice president of sales and marketing
with Erdman Automation. When an
owner feels the investment in his or
her business will have a quicker pay
-
back due to reduced taxes, it simpli-
fies the decision.
It could also give a big boost to
automation efforts as the industry
Tax Cuts Could
Propel Major
Upgrades
New Rules for Immediate Expensing Make it
Easier to Invest in Machinery and Software
BY TREY BARRINEAU
Talk with your tax advisor.
Tax reform of this magnitude is the
biggest change in a generation. It will
require intense focus to understand
not only how the changes apply at
the federal level, but also to navigate
the ripple effect this is likely to have
on state taxes as well.
What to Do Right Now
Here are four steps manufacturing companies should take
now to tackle tax reform, according to BDO:
3
1
4
2
Assemble a team.
While accountants
will probably do most
of the work, compa
-
nies and their finance
teams will have an
important role to play
to gather all the nec
-
essary data.
Establish priorities.
When considering
what to undertake,
focus on the areas
that could have the
greatest affect on
your organization.
Dig into the data. Assessing the
effects of tax reform requires a lot of
data. Organizations need to move
from modeling the impact of tax
reform to focusing on data collec
-
tion and computations as soon as
possible. If you have an international
presence, some of the information
needed could date back to 1987.
19
www.dwmmag.com March 2018
continues to struggle with a lack of
qualified workers.
“I’m not a betting man, but if I
were, I would bet that the combina
-
tion of tax changes, a blooming econ-
omy and a tight labor pool will all
contribute to increased automation
on the factory floor,” says Ron Crowl,
president and CEO of FeneTech.
“We are seeing a lot more activ
-
ity,” says Nick Carter, president of
WoodWare Systems, which makes
software for the millwork industry.
“Were getting new business. That
has definitely accelerated, and exist
-
ing customers are investing in more
technology.
Theres evidence that companies in
the industry are beginning to invest
in new machinery, too. For example,
in mid-January, OrePac, a whole
-
sale building material distributor,
announced a multi-million-dollar
deal with Quebec-based JRC United
to buy EuGénie automatic door load
-
ers, CNC door machines, CNC jamb
machines and automatic con
-
veyors. Also in January, PPG
Industries Inc. told the Wall
Street Journal that it plans to spend
$50 million on capital
projects in the U.S. this
year because of the new
expensing rules.
Some machinery com
-
panies that serve the door
and window industry are
reporting strong
sales—and have
been for a while.
Order and inquiry activity has
been up for the last two years,” says
Joe Shaheen, director of sales with
GED Integrated Solutions. “2017 was
our best year since 2007, and activity
was up at the end of the year partially
due to Section 179 of the tax code.
The new tax bill allows this to con
-
tinue. We had a flurry of activity and
orders at the end of the year, and we
have seen that trend carry into the
first month of 2018.
“Quoting requests have increased
almost 50 percent over the same
period a year ago, and orders have
increased by the same percentage,
says Wes Schneekloth, the technical
sales manager with CSE Automation.
Others dont see a huge rush to take
advantage of the tax changes—so far.
“The reaction was mixed,” says
Jack Pennuto, senior vice president at
Formtek Group Inc. “The tax bill was
passed so late that many customers
were already shut down for the end-
of-year holidays. There were some
that jumped in and bought equip
-
ment last minute to decrease their
2017 tax obligation. Since the first of
the year, the inquiry volume has been
about the same as a year ago. There
seemed to be a lot of enthusiasm
at the beginning of 2017, and that
activity seems to be about the same
in 2018.
Todd Tolson, the director of sales
with ProLine Automation Systems,
echoes that sentiment.
Although weve been quite busy
quoting and selling over the last few
months, I havent had anyone direct
-
ly tell me that they’re purchasing or
interested in purchasing due to some
new tax break,” he says. That said,
I’m sure some of the increased activ
-
ity were seeing is due, in part, to the
changes in the tax code.
“We are seeing quotation activi
-
ty remain high but have not heard
customers attributing their inter
-
est to the tax bill,” says Michael
Biffl, the national sales manager
with Sturtz.
Whether youre looking to invest
in new equipment and software now
or in the future, DWM has gathered
crucial information that could help
guide your decision.
Equipment Purchases $1.15 million
First-Year Write-Off $1 million
100 Percent First-Year Depreciation $150,000
Normal First-Year Depreciation $0
Total First-Year Deduction $1.15 million
Cash Savings
($1.15 million x 35-percent tax rate)
$402,500
Equipment Cost After Tax
(assuming 35-percent tax bracket)
$747,500
Source: section179.org; Crest Capital
Using Section 179 in 2018
Here’s a sample calculation for purchasing machinery or
equipment and using the Section 179 deduction.
continued on page 20
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Door & Window Market www.dwmmag.com
Provision Summary of Changes Implications for Manufacturers
Reduce the
Corporate Tax
Rate
Reduces the top corporate tax rate from 35 to 21 percent.
Effective date: Taxable years after Dec. 31, 2017
A huge win for manufacturers. The effec-
tive actual tax rate for manufacturers has
historically averaged 22 percent.
Repeal the
Corporate
Alternative
Minimum Tax
(AMT)
Conforming to the repeal of the corporate AMT, the bill
also repeals the election to accelerate AMT credits in lieu
of bonus depreciation.
Effective Date: Taxable years after Dec. 31, 2017
Keeping the corporate AMT would have
made it difficult for businesses to reduce
their effective corporate tax rate lower
than 21 percent.
Pass-Through
Tax Treatment/
Section 199A
Raises the deduction available to pass-through filers to 20
percent.
Effective date: Taxable years after Dec. 31, 2017
Because many manufacturers are struc-
tured as pass-throughs, this should end
up as a net positive for the industry.
Limitations
on Interest
Deductibility
Revises Section 163(j) and expands its applicability to
every business, including partnerships. Generally, caps
deduction of interest expense to the sum of 1) business
interest income; 2) 30 percent of adjusted taxable income
(computed without regard to deductions allowable for
depreciation, amortization, or depletion; and 3) the taxpay-
er’s floorplan financing interest for the tax year. Disallowed
interest is carried forward indefinitely. Contains a small
business exception.
Effective date: Taxable years after December 31, 2017.
This is a base broadener that would limit
the interest deduction to 30 percent of
EBITDA for four years, then 30 percent
of EBIT thereafter. The interest expense
ceiling could be problematic to manufac-
turers that rely heavily on debt financing.
Repeal of
Domestic
Production
Activities
Deduction
(DPAD or
Section 199)
DPAD was a tax incentive for businesses that manufac-
tured property at least partially within the United States.
Effective date: Taxable years after December 31, 2017.
Manufacturers that previously claimed
the section 199 deduction will no longer
be able to reduce their tax rate by the
benefit; however, this impact will likely be
offset by the significant reduction in over-
all tax rates.
Research Tax
Credit
The Research Tax Credit’s net value was effectively
increased by 22 percent—from 65 percent to 79 percent
of incremental qualified spending—because of the corpo-
rate rate’s reduction to 21 percent and the required Sec.
280C(c)(3) election or addback of R&E deduction.
Effective date: Taxable years after December 31, 2017.
In addition to the credit benefit increasing
by 22 percent, the elimination of AMT
means more taxpayers may benefit from
the credit.
R&E Tax
Deduction
Generally, companies may not use an NOL to offset
income in any prior year and may offset only 80 percent of
taxable income (after NOL) in carryforward year.
Effective date: The elimination of carrybacks is effective
in taxable years after December 31, 2017. The current 100
percent allowance is phased down by 20 percent per year
beginning in 2023.
Costs incurred in one year will not be
able to offset 100 percent of taxable
income in the next year. In situations
where manufacturers’ earnings are vola-
tile, the restrictions on the carryback and
use of NOLs could present a significant
cash flow obstacle.
Immediate
Expensing of
Certain Capital
Expenditures
Companies will be able to fully expense certain capital
expenditures, including acquisitions of used property, in
2018.
Effective date: Applies until 2022 for purchases made
after Sept. 28, 2017.
The percentage of allowable expensing will be phased out
at a rate of 20 percent per year from 2023 (80 percent) to
2026 (20 percent).
This is likely to encourage more capital
spending, potentially driving up sales for
manufacturers of products eligible for
expensing, such as machinery and
equipment.
Like-Kind
Exchanges
(Section 1031)
Like-kind exchanges will be limited to exchanges of real
property that is not primarily held for sale.
Effective date: Taxable years after December 31, 2017.
However, there is an exception if the property was dis-
posed of by the taxpayer on or before December 31, 2017.
This imposes greater limitations on the
types of property manufacturers could
consider as part of a like-kind exchange.
Offer a
Deduction for
Foreign-Derived
Intangible
Income
Effectively taxes such income at a reduced 13.125 percent
tax rate. Deduction only available to C corporations that are
not RICs or REITs.
Effective date: The effective tax rate on FDII will be
13.125 percent in tax years beginning after 2017 and
before 2026 and 16.406 percent after 2025.
Some commentators have described this
as being similar to a “patent box,” which
is featured in the tax framework of some
European countries to encourage the
formation of intellectual property within
those respective countries, and provides
a preferential tax rate on certain income.
Tax Reform: What It All Means
BDO, an international accounting, tax and business-advisory firm, recently released a comprehensive look
at what various components of the new tax law mean for manufacturers. Here are some highlights:
Source: BDO
continued on page 25
Tax Cuts
continued from page 19