On December 22, 2017, the highly anticipated tax reform was signed into law. One goal of tax reform was to help attract manufacturers to return to the U.S. and create additional jobs for Americans, to continue to drive down the unemployment rate.
How has this tax reform helped companies in the manufacturing industry? For starters, it lowers the corporate tax rate to 21% which hopefully, will draw businesses back from foreign countries, since the U.S. previously had one of the highest federal corporate tax rates, at 35%, before this tax reform.
Another piece of good news for manufacturers is that they now are able to immediately expense qualified property obtained before 2023 and immediately expense up to $1 million of the cost of certain depreciable assets acquired and placed in service in the tax year. However, the law does repeal the deduction for domestic production activities.
In addition to lowering the corporate tax rate down to 21% from 35%, the reform also eliminates AMT, while still allowing companies who hold AMT credits to use them to reduce or eliminate their future regular tax liabilities.
In the past, many manufacturers have been required to keep inventories on the accrual basis of accounting, allowing only small manufacturers, with less than a $1 million in gross receipts, calculated on a three-year average, to be on the cash basis. The new reform increases that threshold up to a $25 million three-year average and permits any company which passes this test to now report on the cash basis of accounting.
The impact of tax reform will vary from business to business; however, the market is starting to see movement in the right direction for the manufacturing industry. Companies are beginning to hire more employees and pay larger bonuses and salaries due to the reform. It should be quite interesting to see the continued growth over the course of the next few years. If you have questions about how the new tax reform will affect your manufacturing organization, contact us.