Our nation and the state of Iowa are experiencing the largest changes to tax policy in decades. With most of the provisions going into effect in the coming year, it is important that manufacturing industry leaders understand what has changed and how it will impact their companies. We recently sat down with firm partner Eric Thuente to get his take on how the new legislation will impact manufacturers.
Eric works extensively in the agribusiness, manufacturing and processing and distribution industries, specializing in audit and tax planning services. He is also actively involved in the Iowa Association of Business and Industry, the Agribusiness Association of Iowa, and the National Society of Accountants for Cooperatives.
In December 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017, the biggest federal tax reform law in 30 years. Key provisions impacting manufacturers include:
Federal Tax Reform
- 21% federal income tax rate for C corporations.
- Companies will be able to fully expense certain capital expenditures, including acquisitions of used property, in 2018.
- Repeals the election to accelerate alternative minimum tax (AMT) credits in lieu of bonus depreciation.
- Raises the deduction available to pass-through filers to 20%.
- Limitations on interest deductibility. This could be problematic to manufacturers that rely heavily on debt financing.
- 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 overall tax rates.
- Losses incurred in one year will not be able to offset 100% of taxable income in the next year. In situations where manufacturers’ earnings are volatile, the restrictions on the carryback and use of net operating losses could present a significant cash flow obstacle.
Iowa Governor Kim Reynolds signed Iowa’s tax reform bill, Senate File 2417, into law on May 30, 2018, representing historic tax reform for Iowa families, farmers and small business owners. Some key provisions are listed below:
Iowa Tax Reform
- Iowa’s corporate tax rate of 12% will be lowered to 9.8% beginning in 2021. Also in 2021, Iowa corporate AMT would be eliminated.
- Changes definition of manufacturer. If you are both a manufacturer and retailer, the equipment in your retail locations will not be tax exempt.
- The law provides additional tax relief for Iowa businesses and farmers that is phased-in over time. The amount of Section 179 expensing that can be used to compute Iowa income gets increased to $70,000 in tax year 2018, $100,000 in tax year 2019, and $1,000,000 (indexed for inflation) in tax year 2020. Iowa will allow 25% of the Qualified Business Income (QBI) deduction beginning in tax year 2019, 50% in tax year 2021, 75% in tax year 2022, and 100% in tax year 2023 if certain revenue targets are met.
- Iowa’s sales and use tax will be modernized by taxing many digital sales starting in tax year 2019, making the competition fairer between online retailers and traditional brick and mortar businesses. The sales tax expansion will apply to digital products, subscription services, online sellers, online marketplaces, and ride sharing services.
- Ability to deduct federal taxes is eliminated for corporations starting January 2021.
- The Iowa Research Activities Tax Credit will be restricted to businesses involved in manufacturing, life sciences, software engineering, or the aviation and aerospace industries.
Now is the time to initiate conversations with your advisor to prepare for filing 2018 taxes. Manufacturing and agribusiness expert Eric Thuente is on hand to help you evaluate your options. Start here to get a conversation going.
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