By Kip Eideberg, AEM Vice President, Public Affairs & Advocacy

Tax ReformIt was only a month ago that President Trump signed a sweeping tax bill into law, marking the first time the tax code has been overhauled in more than 30 years. During those three decades, the U.S. economy went through a dramatic transformation, accompanied by, and in part caused by, greater global competition, groundbreaking advances in technology, and cheaper and faster communication.

Our outdated tax code could not keep pace and was a drag on equipment manufacturers’ ability to innovate and adapt to these changes. U.S.-based equipment manufacturers faced some of the highest tax rates in the developed world, were punished by double taxation when they participated in the global economy, and were unable to expense much of the investment needed to grow and innovate. The benefits of modernizing the tax code were obvious.

AEM spearheaded our industry’s efforts to bring about a modern system of taxation with globally competitive marginal rates that would make equipment manufacturers more competitive, boost the economy, create jobs and spur wage growth. We worked with Congress and the White House, mobilized our grassroots supporters, commissioned studies and white papers, ran advertisement campaigns and… we got it done. While the final bill – the Tax Cuts and Jobs Act – is certainly not perfect, it represents the kind of reform AEM has fought for years to accomplish.

So how will the new tax law impact our industry? Overall, the stimulative nature of tax reform is expected to expand markets for most equipment manufacturers. Lower rates, full expensing of capital investments, territorial provisions and the R&D credit will all help grow the economy and accelerate the purchase of new equipment.

Here are some of the most significant components and implications of the new law that equipment manufacturers should be aware of:

  • A new, permanent corporate tax rate of 21 percent is effective for tax years beginning after December 31, 2017, allowing equipment manufacturers to realize the tax reform benefits immediately.
  • A first-ever 20 percent tax deduction that applies to the first $315,000 of joint income earned by all businesses organized as S corporations, partnerships, LLCs, and sole proprietorships. Because many equipment manufacturers are structured as pass-throughs, this should end up as a net positive for our industry. (Although it is important to keep in mind, however, that the 20 percent rate only applies to about 20 percent of their pass-through business income, reducing the effective marginal tax rate to no more than 29.6 percent.)
  • A complete repeal of the Alternative Minimum Tax (AMT) and the election to accelerate AMT credits in lieu of bonus depreciation. This was a big win for our industry. Keeping the AMT would have made it difficult for many equipment manufacturers to reduce their effective corporate rate lower than 21 percent.
  • The Research Tax Credit was retained, and its net value was effectively increased by 22 percent; from 65 percent to 79 percent of incremental qualified spending. In addition to the credit benefit increase, the elimination of the Alternative Minimum Tax (AMT) means that more equipment manufacturers should benefit from the credit.
  • A doubling of the amount (approximately $11,200,000 per person or $22,400,000 for a married couple) an individual may transfer free of tax either by gift during lifetime or at death will help many small and mid-sized family-owned equipment manufacturers manage debt, retirement and succession planning. Unfortunately tax reform did not repeal the estate tax in its entirety.
  • The deduction for net business interest is limited to 30 percent of “adjusted taxable income” with interest that is limited subject to an unlimited carryforward. To assist with transitioning into the new rules, equipment manufacturers will be able to add back depreciation and amortization to adjusted taxable income for taxable years beginning after December 31, 2017, and before January 1, 2022.
  • Immediate expensing of cost of qualified property (including used property) placed in service after September 27, 2017, and before January 1, 2023, with provisions that provide for a phase down (20 percent per year from 80 percent to 20 percent) of expensing for property placed in service through December 31, 2026. For an industry that both manufacturers “qualified property” and invests in it, the cost recovery provisions are expected to provide a meaningful investment catalyst for broader manufacturing sector.
  • Like-kind exchanges (Sec. 1031) will now be limited to real property that is not primarily held for sale (personal property assets that can no longer be exchanged include machinery and equipment). This will impose greater limitations on the types of property equipment manufacturers can consider as part of a like-kind exchange.
  • A significant new cost for many non-U.S. equipment manufacturers with operations in the United States, the Base Erosion Anti-Abuse Tax (BEAT) is also likely to be a cost for many U.S.-headquartered equipment manufacturers, given the that many of them have global operations and customer bases. The BEAT targets certain related-party deductible payments (notably, not cost of goods sold) that shift income outside the United States and is imposed if a company’s modified taxable income exceeds the company’s regular taxable income after certain allowable credits.
  • A one-time tax rate of 15.5 percent on cash assets and 8 percent on non-cash assets held offshore, regardless of whether or not the amounts are actually distributed. This is designed to raise tax revenue from income that has not previously been subject to U.S. tax, but it is also meant to encourage companies to invest some of their foreign profits in the United States. While the rates are higher than what we fought for, the revenue raised was used to change or eliminate other provisions to the benefit of equipment manufacturers.

Much work still remains to be done. Unintended technical glitches are likely to come to light, and Congress will have to pass legislation called “technical corrections” to fix these issues. AEM will continue to work with Congress and the White House to push for additional legislative changes to address areas that do not work well, are unfair or complex, or that disadvantage our industry.

In the meantime, it is our hope that the new tax code will allow equipment manufacturers of all shapes and sizes to better grow their business, invest in their employees and support their communities. 

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