If you haven’t yet studied how the new tax law may affect your manufacturing business, it’s probably time to do so. The Tax Cuts and Jobs Act, which passed in December 2017, includes many tax law changes that take effect in 2018 and will affect your tax returns when you file in 2019.
The Tax Cuts and Jobs Act changed the way taxes are calculated for most taxpayers.
Tax rates and brackets were changed, business expense deductions were revised, the standard deduction was increased, personal exemptions were removed, the child tax credit was increased, and other deductions were limited or discontinued. Therefore, you may need to raise or lower the amount when you make your quarterly estimated tax payments during the year.
Visit IRS.gov/taxreform regularly for tax reform updates. You can find details and the latest resources at Tax Reform Provisions that Affect Businesses.
The following information highlights important changes to the new tax law, most of which will impact your manufacturing business.
New or Revised Deductions for Businesses
The Tax Cuts and Jobs Act includes the following new or revised business deductions:
- Adds a new deduction for qualified business income (QBI) from a qualified trade or business operated directly or through a pass-through entity. For more information, see FAQs on the Deduction for Qualified Business Income.
- Eliminates deductions for meal and entertainment expenses. Under the new law, taxpayers can continue to deduct 50% of the cost if business was discussed (whether it’s an internal meeting or client-based meeting) or if it was a business trip-related meal.
- Allows business taxpayers who make business-related payments to charities or government entities for which the taxpayers receive state or local tax credits can generally deduct the payments as business expenses.
- Disallows certain fines and penalties paid to a government for violation of the law.
- Disallows certain payments made in sexual harassment or sexual abuse cases.
- The business expense deduction is available to any taxpayer, whether doing business as a sole proprietor, partnership or corporation, as long as the payment qualifies as an ordinary and necessary business expense.
Changes to fringe benefit deductions
The following important changes to fringe benefit deductions can affect not only your business’ bottom line but also your employees’ deductions:
- Transportation fringe benefits
- Bicycle commuting reimbursements
- Moving expenses
- Achievement awards
Changes to depreciation and expensing for businesses
Changes to some of the laws regarding depreciation and expensing can affect your business’ tax situation, for example:
- Businesses can immediately expense more under the new law.
- A temporary increase to the first-year bonus depreciation percentage from 50% to 100% for certain business assets.
- Changes to depreciation limits for luxury cars and personal use property.
- Shorter recovery period for certain farm property.
- Applicable recovery period for real property.
- Use of alternative depreciation system for farming businesses.
Details on these changes can be found in FS-2018-9, New rules and limitations for depreciation and expensing under the Tax Cuts and Jobs Act.
New and revised tax credits for businesses
- The new tax law provides a new employer credit for paid family leave and medical leave, which is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year. For more information, see the Frequently Asked Questions about the Employer Credit for Paid Family and Medical Leave and Notice 2018-71.
- The new tax law repeals the 10 percent rehabilitation tax credit for buildings placed in service before 1936, while it keeps the 20 percent credit for expenses to rehabilitate a certified historic structure.
Accounting methods for small businesses
The Tax Cuts and Jobs Act allows small business taxpayers with average annual gross receipts of $25 million or less in the prior three-year period to use the cash method of accounting.
The law increases the number of small businesses eligible to use the cash method of accounting and also exempts those small businesses from certain accounting rules for inventories, cost capitalization, and long-term contracts. As a result, more small businesses are allowed to change to the cash method of accounting starting after Dec. 31, 2017.
Impact on the R&D Tax Credit
It's important to note that the new law not only preserved the Research and Development Tax Credit, but it actually enhanced the value of qualified activities. With the maximum corporate tax rate now at 21% instead of 35%, the reduced credit now equals 79% instead of 65% of the research credit (100% less 21% versus 100% less 35%).
Interested in learning more about how taxes affect your manufacturing business, or how to offset them with the R&D tax credit? Contact our team and we'll be happy to help!