Webinar - tax reform & manufacturing

1. TAX REFORM IMPACT ON
MANUFACTURERS
March 20, 2018
Live Webinar: 12 pm
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2. …One Organization at a Time
Building Competitive Futures

3. About IMEC
Mission
Committed to Driving Growth through
Enterprise Excellence
Vision
Leading the way for organizations to create
their competitive future

4. Committed to Industry Excellence
From manufacturing to healthcare, and education to other
small business and service organizations, IMEC is
committed to partner with organizations as they execute
and succeed in all areas of Leadership, Strategy, Customer
Engagement, Operations, andWorkforce.

5. A Validated Leading Edge Model

6. Expertise Across Illinois
With more than 50 full-time
staff and partners positioned
statewide, IMEC assists more
than 500 companies each
year with successful
improvement and innovation
projects.

7. The Impact on Illinois Communities
IMEC has a demonstrated Return on Investment
that exceeds 19:1
• 614 companies assisted
• 3,677 jobs created and retained
• $131,000 cost savings per client
• $254,000 investment spending per client
• $1.3M new and retained sales per client
• $411,367,826 aggregate impact
*Reported on annual NIST-MEP manufacturing survey

8. TAX REFORM IMPACT ON
MANUFACTURERS
1. Capital Spending & Depreciation
2. Tax Rates – C corp vs. Individual
3. Section 199A Deduction
4. Repeal of DPAD – Section 199
5. Accounting Methods & Inventory
6. Research Credit & Expenses
7. Business Interest Limited
8. Like Kind Exchanges of Personal Property
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9. Glen Birnbaum, CPA
Shareholder at Heinold Banwart, Ltd – CPA firm in East
Peoria, Illinois
Experience:
• Tax – S corps, partnerships, LLC’s, & 263A inventory
capitalization
• Valuation – in particular: working capital targets in the
context of M&A, due diligence, estate and gift tax
valuation discounts
• Audit – in particular: manufacturing and agriculture
www.hbcpas.com
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10. 1. Capital Spending
• Section 179
• From $510,000 in 2017 to $1 million in 2018
• Bonus Depreciation
• From 50% to 100% writeoff 2018 through 2022
• Can now take bonus depreciation on used assets
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11. Section 179
• New or used qualified property
• Can choose as much or as little as you want –
very flexible to get to target taxable income
• Expanded definition to include roofs, HVAC
equipment, fire alarms, security systems
(replacements)
• Cannot create a loss
• Phaseout starts at $2.5 million
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12. Bonus Depreciation
• New or used equipment. Previously had just
been new
• Generally elect “out” or “in” by class life (all 7
year property) – therefore less flexible
• Generally for 20 year or less tangible property
• Can create a loss with this deduction
• No phaseout (largest companies can use this)
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13. 2. Tax Rate Comparison
• C corporation rates lowered to 21% - flat rate
no matter the income
• 21% rate equates to about 100,000 if taxable
income for a manufacturer under old C corp rate
structure
• In IL with state C corp rate at 9.5% but
deductible, overall effective tax rate is about
28.5%
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14. 2. Tax Rate Comparison
• Individual Rates (S corp, partnership, LLC)
• Rates lowered - top federal rate lowered to 37%
with potential to be 29.6% with full 199A deduction
(37% x 80%)
• Brackets widened – see next page
• State and local income taxes limited to $10K
at individual level, making most business state
income taxes nondeductible
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15. 2. Indiv. Rate Comparison
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Old
Law
New
Law
---Married Filing Joint--- ---Married Filing Joint---
Lower Upper Rate Lower Upper Rate
$ - $18,650 10.0% $ - $19,050 10.0%
18,650 75,900 15.0% 19,050 77,400 12.0%
75,900 153,100 25.0% 77,400 165,000 22.0%
153,100 233,350 28.0% 165,000 315,000 24.0%
233,350 416,700 33.0% 315,000 400,000 32.0%
416,700 470,700 35.0% 400,000 600,000 35.0%
470,700 39.6% 600,000 37.0%

16. 3. Section 199A
• Brand new code section (guidance
forthcoming from IRS)
• Expires January 1, 2026
• Applies to taxpayers other than C
corporations
• 20% deduction on net business income
• Can reduce the top individual federal rate
down to about 30%
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17. 3. Section 199A
• Taxable Income Limits
• If under $315,000 taxable income (married)
• Only limit is 20% of overall taxable income
at individual level
• If over $415,000 taxable income (married)
• Also limited to greater of
• 50% of wages paid by the business OR
• 25% of wages paid plus 2.5% of
qualified property
• Between - $315,000 to $415,000: Phaseout
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18. 3. Section 199A
• Are wages more than 40% of taxable income?
• Temp wages vs. regular wages?
• Guaranteed payments to partner owners = DQ
• Qualified Property – 2.5%
• Unadjusted cost basis of property
• Factors in for the greater of 10 yrs or the
depreciable life of the property
• Equipment = 10 yrs
• Building = 39 yrs
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19. 3. Section 199A
• Trade or Business?
• Owner Occupied Property – triple net lease
• Manufacturer paying rent to LLC under common
control
• Will taxable income of LLC be eligible for the
20%?
• Guidance forthcoming from IRS
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20. 4. Section 199 Repealed
• This code section was repealed
• Was applicable to C corporations as well
• “Domestic Production Activities Deduction”
• Had been targeted to manufacturing, growing,
constructing, extracting, making, baking, etc.
• Was 9% of taxable income for manufacturers
• Subject to a 50% of wages limit
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21. 5. Research Credit
• Research credit was preserved
• In 2022, research expenses need to be
capitalized and amortized over 5 yrs instead
of being expensed currently
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22. 6. Accounting Methods
• 263A Uniform Inventory Capitalization Rules
• Inventory Method of Accounting/Cash Basis
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23. 6. 263A Inventory
• For manufacturers with less than $25 million
in revenues – no longer apply 263A
• Simplification of the Code
• Required separate computation/set of costing
records to capitalize additional indirect and
administrative costs to inventory for tax
• Generally IRS requires you to capitalize more
costs than GAAP accounting
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24. 6. Inventory Method/Cash Basis
• For businesses with less than $25 million in
revenues. Previously was $1 million
• Potential to only capitalize materials costs
• Would not need to capitalize labor or overhead
(since 263A would not apply)
• But need to follow this method for book accounting
as well (lender impact?)
• Also potential to use cash basis of accounting
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25. 7. Business Interest Limit
• Limit applies only if revenues > $25 million
• Except for “tax shelters”
• Net business interest is deductible if below 30%
of adjusted taxable income
• Years: 2018-2021 = EBITDA
• Years: 2022 and after = EBIT
• Limitation will be much harder to pass in 2022 given
depreciation rules
• Any interest amount not deductible will carryover to
next year
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26. 8. Like Kind Exchanges
• Personal Property
• In past gain was deferred
• 2018: Trade in allowance considered sales
proceeds
• Will recognize gain on sale even though no
cash received
• However, cost of new item may be able to be
fully depreciated
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27. 8. Like Kind Exchanges
• Example 2017:
• $350K new item, $250K trade in allowance.
Net $100K of cash or loan needed = basis to
depreciate
• No gain recognized
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28. 8. Like Kind Exchanges
• Example 2018:
• $350K new item, $250K trade in allowance.
Net $100K of cash or loan needed
• $250K of gain recognized (assumes $0 basis
in old)
• But $350K of new basis to depreciate
• Same net $100K (watch state depreciation
rules though)
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29. Takeaways
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• Manufacturers have an overall “win” with the new law
• Manufacturing demand for new equipment could be hurt
somewhat because used equipment is now eligible for bonus
depreciation
• 199A – be aware of wages to taxable income percentage
• Or rely on 2.5% of qualified property plus 25% of wages
• Evaluate “entity choice” but be mindful of possible future tax
law changes or tax law sunsets
• Owner occupied real estate – triple net lease – 199A

30. Takeaways
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• $25 million is revenue threshold for several items
• 263A costs in particular (less than $25 million)
• Inventory accounting method (less than $25 million)
• Interest expense limitation (more than $25 million)
• Be aware of “timing differences” – in particular book vs. tax
depreciation. Eventually these will reverse (assets sold)
• At what tax rate are you saving today vs. what will rates be in future?

31. Questions?
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32. Thank You!
Glen Birnbaum, CPA
gbirnbaum@hbcpas.com
201 Clock Tower Drive, Third Floor
East Peoria, IL 61611
www.hbcpas.com309·694·4251
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