How Tax Reform Will Affect Manufacturing
The final touches are being made for sweeping change to corporate and private tax structure in the United States. One of the most notable changes is the reduction of the corporate tax rate from 35% to 21%, a move designed to encourage businesses to stay in the country or reshore their operations. What will these tax cuts means to your industry? In this write-up, we’ll break down their likely impact on a few key areas of manufacturing.
Oil and gas companies currently pay one of the highest tax rates in the United States. A reduction in their tax rate is likely to be redistributed for new fossil fuel exploration and operations, which means larger workforces and more money towards R&D.
Part of the tax plan allows deductions on capital expenditures. This could allow plenty of businesses to use those deductions on any sort of purchases of new inventory as well as machinery, reducing their annual taxes significantly. On the customer-facing side, a higher tax return for private citizens tends to lead to more discretionary spending, which is most heavily felt by businesses in the consumer goods industry.
Large companies that have high overseas profits are likely to see a reduction on the taxes they have to pay to repatriate those funds into the United States. This means less money lost to taxes and more money placed in domestic investments such as new plants and logistical networks.
In general, most manufacturing companies are likely to see less drastic tax changes than, say, financial firms due to the higher standing rates that the financial sector pays. There are also some provisions that benefit manufacturers now but expire after a few years. Full cost of capital investments is set to expire after five years, and the annual tax credit for research and development will reduce year by year. With the framework in place, it’ll be up to companies and their lobbyists to encourage lawmakers to make sure the manufacturing industry sees long-term benefits from the tax restructuring. How does your business plan to change its investments or operations in light of these tax changes? Share with us in the comments below.