The Bottom Line: The Impact of Tax Reform on Moldmaking
The Tax Cuts and Jobs Act of 2017 should decrease a moldmaker’s overall tax liabilities.
In December of 2017 Congress passed, and President Trump signed into law, the Tax Cuts and Jobs Act of 2017 (the Act), making numerous changes to how mold builders are assessed and how they pay their income taxes.
The Act dropped tax rates across the board, changed tax credits and incentives and limited or altogether eliminated. Overall, mold builders’ U.S. tax bills should decrease. Here is a breakdown of the changes that are most likely to impact mold builders and related suppliers.
C Corporation Changes
The Act, which went into effect on January 1, 2018, permanently reduces the corporate tax rate to a flat 21 percent, replacing the graduated rates of 15 to 35 percent. For shops with non-calendar year-ends, the IRS will use Internal Revenue Code (IRC) §15 and apply the different tax rates on a pro-rata basis, based upon the number of days before January 1, 2018 and the number of days after December 31, 2017.
In addition, the Act eliminates the corporate Alternative Minimum Tax (AMT) for tax years beginning after 2017. The Act also allows tool shops to request refunds of the AMT credit carryforwards over the next four years. Any AMT credits remaining in 2021 will be refunded to the taxpayer.
Overall, mold builders’ U.S. tax bills should decrease.
Pass-Through Entity Deduction
The Act allows individuals and some trusts that own an interest in a partnership, S Corporation or a sole proprietorship to deduct 20 percent of domestic qualified business income for tax years beginning after December 31, 2017 and before January 1, 2026.
However, some limitations exist. For example, the deduction is equal to the lesser of the combined qualified business income of the taxpayer or 20 percent of the taxable income. The deduction reduces taxable income, not adjusted gross income. Also, eligible owners are entitled to the deduction whether they itemize their deductions or claim the new, greater standard deduction. Consultants, attorneys and accountants working with mold builders may have additional limitations to the deduction.
What is more, the deduction is limited to the greater of 50 percent of the W-2 wages that the mold shop pays. Or, the deduction is limited to the sum of 25 percent of the W-2 wages that the mold shop pays plus 2.5 percent of the unadjusted basis, immediately after purchase, of all qualified property. The unadjusted basis is the basis of property that would be used to figure a gain on the sale of the property but without reduction for any depreciation deductions.
Property and Equipment
In one of the only retroactive provisions, the Act allows for 100-percent bonus depreciation for eligible property that is placed into service after September 27, 2017 through December 31, 2022, with the benefit phased out over the next five years as follows:
- 80-percent bonus depreciation for property placed in service during 2023
- 60-percent bonus depreciation for property placed in service during 2024
- 40-percent bonus depreciation for property placed in service during 2025
- 20-percent bonus depreciation for property placed in service during 2026
In a change from past bonus depreciation rules, this applies to both new and used qualified property, assuming it is “new to the taxpayer.” That is to say that if a mold shop is leasing a piece of equipment and then purchases the equipment, it will not qualify for bonus depreciation since the equipment is not new to the mold shop.
Additionally, shops may elect under IRC §179 to deduct the cost of qualifying property placed in service during the tax year rather than elect to recover the costs through depreciation deductions. The Act increases the §179 depreciation limit from $510,000 to $1,000,000 for tax years beginning after December 31, 2017. The IRC §179 limit is phased-out, dollar-for-dollar, for purchases exceeding a threshold amount, which the Act increased from $2,000,000 to $2,500,000.
If Congress was aiming for simplification with the Tax Cuts and Jobs Act of 2017, it missed the mark.
The Act keeps the R&D tax credit in its current state, so moldmakers can continue to use it to reduce their tax liabilities. This credit actually became more beneficial because of the decreased corporate tax rate. However, moldmakers must begin to capitalize their research expenditures that are paid or incurred in tax year 2022 and thereafter over a period of five years (or over a period of 15 years for research performed outside of the United States).
Methods of Accounting
Historically, most mold builders have been required to use the accrual method of accounting in reporting their revenue and related deductions. However, for tax years beginning after December 31, 2017, mold shops with average annual gross receipts of $25 million or less for the prior three tax years may use the cash method of accounting, regardless of the shop’s entity structure. That is to say that the shop will recognize revenue when it receives the cash and claim deductions when the expense is paid. These shops also are exempt from accounting for inventories in a traditional manufacturing sense, meaning that they can treat their inventory as incidental supplies and deduct the inventory when it is used in the manufacturing process. Lastly, these shops will be exempt from the Uniform Capitalization (UNICAP) rules, and will not be required to capitalize their indirect expenditures and overhead into the cost of their inventory.
New Limits on Deductions
The Act places specific limitations on interest deduction and net operating losses. For tax years beginning after December 31, 2017, the deduction for net interest expense that a shop incurs with average annual gross receipts greater than $25 million is limited to the sum of the business interest income and 30 percent of the adjusted taxable income. Any amounts exceeding this limit may be carried forward indefinitely.
Also, the net operating loss (NOL) deduction is limited to 80 percent of the taxable income for NOLs arising in tax years beginning after December 31, 2017. Excess NOLs can be carried forward indefinitely, but NOLs can no longer be carried back.
Specific Deduction Eliminations
The Act eliminates the deduction for entertainment expenses but preserves the limited deduction for business meals. It also eliminates the domestic production activities deduction for tax years beginning after December 31, 2017.
If Congress was aiming for simplification with the Tax Cuts and Jobs Act of 2017, it missed the mark. The Treasury will be issuing significant guidance to interpret these new rules over the next couple of years. While guidance is needed, one thing is for sure—the overall tax liabilities of mold shops should decrease, making them more competitive in the global marketplace.
About the Contributor
Michael J. Devereux II, CPA, CMP
Michael J. Devereux II, CPA, CMP is a partner and director of Manufacturing, Distribution and Plastics Industry Services at Mueller Prost LC.
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