Updated: Aug 3, 2020
Powerball winners take the lump sum because it gives them certainty and control. Manufacturers and job shops also crave certainty in the business environment. They have a little more with the enactment of the Tax Cuts and Jobs Act (TCJA) of 2017. This first major overhaul of the U.S. tax code since 1986 cut the corporate tax rate from 35 percent to 21 percent and eliminated the Alternative Business Tax.
The TCJA also increased two powerful incentives for companies considering investments in manufacturing technology. First, the law permanently expanded Sec. 179 expensing, a tax provision that permits businesses to deduct the cost of equipment they finance, lease, or purchase in the same year. The TCJA raised the maximum Sec. 179 deduction to $1 million from $500,000 for total purchases up to $2.5 million, an increase from $2 million. Sec. 179 is often referred to as “small business” expensing because of the spending limits.
Bonus depreciation, on the other hand, has no limits on purchase amounts. It allows a business to write-off their capital investments faster with a first year “bonus” on regular depreciation schedules. Previous law permitted 50 percent bonus depreciation of new equipment purchases, meaning a company could write off half of their qualified purchases in the first year and depreciate the remaining balance over time. The TJCA increased the depreciation “bonus” to 100 percent allowing the cost of the equipment to be recovered in the same year it was purchased. The law also extended the provision to used equipment purchases as well as new. Unfortunately, bonus depreciation is not permanent and begins phasing out in 2023 until it disappears entirely at the end of 2026.
“The TCJA spurs growth in capacity, productivity, and profitability in manufacturing,” says Patrick McGibbon, Chief Knowledge Officer at AMT – The Association For Manufacturing Technology. “These measures put more of the income made by manufacturers and their employees back into their hands and eventually into the economy. In addition, the bonus depreciation allowance and Section 179 deduction provide manufacturers strong incentives to return to their investment patterns swiftly after the challenges of the COVID-19 crisis abates.”
As shown in Figure 1, the Section 179 deduction can lower the cost of a $100,000 equipment purchase to $79,000. In a second scenario (see Figure 2), a Section 179 coupled with bonus depreciation can lower the cost of a $2,000,000 investment to $1,580,000.
Historically, the tax code required businesses to depreciate equipment over seven years. This inherently put U.S. manufacturers at a disadvantage when competing against businesses located in countries with more supportive government policies — which is just about every other industrialized nation.
“If you put a seven-year timeline on a piece of equipment, that piece of equipment becomes antiquated and overcome by new technologies,” explains McGibbon. “The owner doesn’t think they have obtained the full tax benefit yet, so they hang on to older equipment when there’s a newer, more productive alternative.”
The average age of metalworking equipment is more than 10 years old. To put this into perspective, go back just a decade; multifunction machines, metal additive machines, IIoT, and the MTConnect interoperability standard were just gaining recognition as commercially viable technologies. Now they are mainstays. If a business waits seven years to buy new manufacturing technology, it will be less competitive.
“The U.S. needs a system that helps manufacturers continuously reinvest new capital on a regular basis so that they stay at the leading edge of efficiency and productivity,” says Douglas K Woods, President of AMT. “Digital technologies will be the driving force that helps U.S. companies strengthen their supply chain and compete globally.”
Woods specifically cites the investment opportunities in automation, metrology, digital twin, additive manufacturing, and data-driven/connected systems.
The Cost Case
According to the Tax Foundation, making bonus depreciation permanent would reduce federal revenues by $141 billion ($98 billion on a dynamic basis) over the 10-year budget window.
“There is a short run cost to this provision, but our nation would get a return on its investment moving forward,” says McGibbon. “The U.S. would have more world-class production capabilities that would strengthen manufacturing and create organic incentives for manufacturers to produce more here. In ordinary circumstances, we’d grow GDP about three to four percent. In a post-coronavirus situation, the TCJA is an important stimulus.”
Amber Thomas, Vice President of Advocacy at AMT, notes that in all types of business, and particularly in manufacturing, the toughest element to deal with is uncertainty.
“One of the most important actions the government can take to strengthen manufacturing is to introduce a higher level of certainty in the tax code,” she says. “Tax provisions that promote investment and growth in manufacturing should be considered permanent long-term investments in a national pro-growth strategy.”
Rebuilding the Supply Chain
Whether you are an advanced manufacturer, job shop owner, or OEM, you are in the midst of your own supply chain challenges, uncertainties, and questions. In an extraordinary effort to support you, AMT and IMTS are dedicating signiﬁcant staff and ﬁnancial resources to help you rethink, reengage, and reestablish supply chains. Visit www.IMTS.com/SupplyChain to learn more!
Have you helped an OEM or manufacturer source closer to production? Share your experience at IMTS.com/stories.