NAPLES, Fla.—Michael Devereux says federal tax reform has plenty of good things for companies that make things: big corporate tax cuts, a 100 percent bonus depreciation, improved incentives for property improvements, and no changes to the R&D credit for research and development.
"I'm bullish on tax reform. I think it's just going to be wonderful for U.S. manufacturers," Devereux, an accountant, said at the Plastics News Executive Forum in Naples in March.
American companies immediately can write off 100 percent of the cost of capital purchases placed into service between Sept. 27, 2017, and the end of 2022.
"I go out and buy a new press. I can write it all off in one year," said Devereux, a partner at St. Louis-based Mueller Prost L.C. who coordinates the tax incentives program.
He called out one change for the bonus depreciation area: It now applies to used machines, not just new ones.
"Under the new law in the tax reform, it just has to be new to you. So, the only instance of not new to you is where I'm leasing an asset and then I buy it off that lease. Well, then it's not new to me," he said.
The immediate write-off had big implications for companies at NPE2018, May 7-11 in Orlando, Fla., where the focus was on the new, latest technology. The Plastics Industry Association thinks the 100 percent bonus depreciation will boost machinery purchasing at the show, which is held every three years.
Association President and CEO Bill Carteaux said NPE typically is an indicator of the industry's mood and the show has an impact even in normal economic times.
"The business activity that starts at the trade show floor eventually ripples out into new purchases in the weeks and months that follow. This year, those weeks and months will be busy for NPE exhibitors, in a good way, thanks in part to the tax bill's immediate expensing provision," Carteaux said in a statement released by the Washington-based trade group prior to NPE.
More M&A activity?
At the Executive Forum in Naples, Devereux said the deprecation also should boost mergers and acquisition activity in the plastics industry.
"If you're buying assets, you get it on the asset purchase. That's significant," he said. "I think it's going to increase the number of deals. I think it's going to increase the purchase prices of some of your businesses, if some of you are selling."
President Trump signed the sweeping, $1.5 trillion tax cut change on Dec. 22. Devereux called the Republican tax reform the biggest tax overhaul in more than 30 years. The changes slash the tax rate from 35 percent to 21 percent for corporations.
"This is extremely significant," he said. "Now we have a lower corporate tax rate than some of our trading partners. This C corp rate was really dramatic."
So-called S corporations, which account for most plastics processors, also get some tax relief from their pass-through income. Business profit or loss is taxed at the individual's income tax rate. That includes income from S corporations, partnerships and sole proprietorships.
Devereux said he's getting a lot of calls from S corporation firms asking if they should change to a C corporation to get the bigger tax break.
"The bottom line: You have to run the numbers. You've got to run them both ways and you got to look in your crystal ball and say, am I going to hold onto this business longer than five years, or not? Because once I revoke my S election and become a C corp., I have to wait five years before I can go back to being taxed as an S corp," he said.
Whether to change corporate structure is an individual issue for every company owner.
"Like everything when it comes to taxes, it depends," Devereux said. "Are you planning on selling your business in the next five years? What's your exit strategy? Are you buying partners out? Are you selling your shares? If you're going to sell your company, is it going to be an asset sale? Or is it going to be stock sale?"
Devereux said there were no changes to the federal tax credit for research and development. But the corporate business tax cuts make them even more attractive, he said.
For example, a corporation investing $1 million in research results in a $100,000 tax credit.
"The general rule is, I have to reduce my expenses by the amount of the credit," he said. "Now I got $100,000 of additional taxable income. The old law results in $35,000 of additional tax. Well now, under the new law, it results in $21,000 in additional tax."
He said S corporations also gain. Those that claim the reduced credit, meaning that don't have to adjust expenditures, but get a lower net credit.
"Generally speaking, under the old law, that $100,000 credit was worth $65,000. Now, the inverse of the top corporate tax rate is 79 percent. So that $100,000 tax credit, just became worth $79,000. My credit just went up 22 percent," he said.
There is some bad news about the R&D tax credit. Beginning in 2022, companies will have to amortize and capitalize R&D spending over a five-year period. Devereux said that was a surprise in the tax reform, added at the last minute to keep the total tax cut at the $1.5 trillion level.
"So they said, we'll raise the taxes, but we'll raise them five years out from now," he said, calling it an example of kicking the can down the road. But Devereux thinks lawmakers will fix it before it actually takes effect. The R&D credits are popular and widespread.
"We've been able to deduct our research expenditures as they're paid or incurred since 1954, when we had a tax change. It's too ingrained in our economy," he said.
Devereux also addressed more-generous changes to Section 179 of the federal tax code, which applies to making building improvements, with full expensing.
"They've added some categories of expenditures that are eligible. So, if you're replacing your roof, you're putting in a new HVAC system, security systems or fire protection system, these all qualify for Section 179," he said.
Devereux said the tax reform allows for four changes in accounting method for smaller companies.
He joked about promises that the federal government would simplify taxes.
"Everybody said this: we're going to be able to file our tax returns on a postcard. Baloney. If they were looking for simplification they missed the mark completely," he said.