Potential tax changes in 2013 could have a significant impact on manufacturers, particularly when it comes to capital expenditures.
In fact, the group of federal spending cuts and tax increases known as the fiscal cliff that could take effect at the end of the year has already caused some concern and caution among manufacturers.
The National Association of Manufacturers released a survey earlier this month that showed the prospect of higher taxes and reduced spending caused 62.9 percent of manufacturers to reduce their business outlook for 2013.
“As negotiations to avert the fiscal cliff drag on, Washington policymakers cannot continue to ignore the dangerous warning signs from the manufacturing sector,” said NAM president and chief executive officer Jay Timmons. “Without action to address the fiscal issues facing us, manufacturers are at serious risk. The message from manufacturers couldn’t be clearer and their concerns more justified–they are worried for their businesses, their employees and our nation’s future. Washington must listen to their call. Restoring certainty and implementing pro-growth business policies is critically important, not only for the health of manufacturing in the United States, but for the health of our entire economy.”
There are a few tax changes that would impact manufacturers specifically, such as lowered expensing allowances, said Steve Bjork, tax manager at Milwaukee-based Komisar Brady & Co. LLP.
Currently, businesses spending $560,000 or less on capital expenditures can deduct the first $139,000 in qualified purchases. In 2011, that deduction was $500,000 when spending $2 million or less. Next year, the deduction could drop to $25,000 for $200,000 in spending, he said.
These expensing changes, in conjunction with bonus depreciation, would especially affect manufacturers making equipment investments, said Jon Neal, owner of The Neal Group LLC in Milwaukee.
“It affects everybody, but with manufacturing it may be harder hit,” Neal said. “It’s an election that you can make to expense capital purchases made during the year rather than write them off over a period of years.”
Bonus depreciation, which applies only to new equipment purchases, currently allows a business to deduct 50 percent of the future depreciation of the equipment in the year it is purchased.
“In 2011, you could write off 100 percent of the cost of these depreciable assets, as long as the assets were new,” Bjork said.
In 2013, if nothing changes, same-year bonus depreciation will no longer be offered.
“What I would advise a manufacturer or any business client is to look at their capital needs and if it makes sense, to buy before the end of the year so you can write off more of the cost in the current year,” Bjork said.
Several tax “extenders” on research and fixed assets could prove helpful to manufacturers, if approved retroactively for 2012 and for 2013.
Among the proposed extensions is a research and development tax credit, a permanent dollar-for-dollar deduction against a manufacturer’s tax liability for investments in research, said Ed Maginot, a partner in Grant Thornton’s Milwaukee tax office.
The credit for money spent on research and development is 6.5 percent. It has been in place since 1981 and Congress has chosen to extend it every year, except one.
It expired in 2012 but can be retroactively extended partway through the year, Maginot said. The lapse discouraged research and development.
“(Manufacturers have) been going through the year saying ‘I may have to cut back on R&D,'” he said. “It’s still a good thing, but the argument is it didn’t help 2012 because businesses didn’t think it was around.”
The credit, which is not just for cutting-edge technology but also for process improvements in an individual business, could expire again in 2013, Neal said.
The easiest expense to cut is research and development, since it’s not going to benefit a company in the next six to 12 months, but is a more long-term investment, Maginot said.
The alternative fuel credit is also up for extension in 2013. It is a credit for companies that try to use or develop alternative fuel.
Propane, often used in forklifts, is one such fuel. Larger manufacturers may spend hundreds of thousands of dollars on propane each year.
“If you use propane in business, then you can get a 50 cent per gallon credit on the use of propane,” Maginot said.
A federal deduction for qualified production activities – anything that’s manufactured, produced, grown or extracted in the U.S. – that was part of the Bush tax cuts will likely expire in 2013, Neal said.
At the same time, Wisconsin manufacturers can look forward to a new state production activity tax credit in 2013, which will be fully phased in by 2016.
The credit allows for a company to deduct 7.5 percent of its qualified production activities income. This will effectively reduce the rate of tax on a Wisconsin manufacturer or farmer from 7.9 percent to 0.4 percent once it’s fully implemented, Bjork said.
In addition to the federal and state tax changes, a 3.8 percent Medicare surtax will be charged on investment income over $250,000 starting in 2013. This could spell bad news for manufacturers organized as S Corporations, since their profits are passed through shareholders.
“For pass through entities – partnerships or S corporations, there’s so much uncertainty that it’s really hard to plan,” he said.
But if a business needs to make a new purchase in the next few months, it may make sense to fit it into 2012, Bjork said.
“If you have plans for capital expenditures, just so you know certainly what you can do, you may want to speed up your purchases,” he said. “That doesn’t mean going forward that the higher (expensing) or bonus depreciation isn’t going to come back.”
It’s difficult to plan in this environment, Neal agreed.
“A lot of people just hunker down and keep plodding along hoping that both the economy gets better and the tax situation gets better,” he said.
But it may be advantageous to prepare for change. The typical advice is flipped this year: instead of postponing income and accelerating deductions, businesses may want to accelerate income into 2012 and defer deductions to 2013, Neal said. n
