Tax reform considerations for manufacturers
What the new tax bill could mean for manufacturers big and small.
With the passage of the tax reform late last year, the new legislation marked the biggest change to the US tax code in decades.
While most of the changes appear to benefit food and beverage manufacturers, there a few key areas businesses should be aware of.
To get more information about this, FE talked to BDO tax professionals Todd Simmens and Rick Schreiber. Todd is a former staffer for the Joint Committee on Taxation and BDO’s National Managing Partner of Tax Risk Management, and Rick is the national leader of BDO’s Manufacturing & Distribution practice.
FE: What are some of the tax reforms that US food and beverage manufacturers should be aware of?
Schreiber & Simmens: The passage of tax reform lowers the top corporate tax rate from 35 percent to a flat 21 percent—a boon for manufacturers of non-durables, which have historically averaged an effective tax rate of 23 percent. In addition, food and beverage manufacturers structured as pass-throughs stand to gain from the new pass-through treatment (Section 199A), which lowers the top rate for pass-through business income from 39.6 percent to 20 percent. These changes, in conjunction with the repeal of the corporate alternative minimum tax, spell big savings.
While the new tax legislation is mostly a win for food manufacturers, there’s some bad news mixed in with the good. For example, the repeal of the Domestic Production Activities Deduction (DPAD) is a small setback, as this incentive was specifically designed for manufacturers of all kinds. Prior to the passage of reform, an American food and beverage producer making at least 20 percent of its product in the US would have been eligible for this deduction. On the bright side, it’s likely the lower rates will offset the loss of this incentive, and others like it.
FE: What could some of these reforms mean for their business?
Schreiber & Simmens: The new legislation marks the largest change to US tax policy in decades. It’s important to carefully review the new legislation in its entirety to identify which provisions are most relevant and analyze whether the impact will be favorable or unfavorable.
Tax reform isn’t just a big deal for the finance and accounting department; it’s potentially transformational for the entire business. Food manufacturers on the verge of major strategic business decisions, such as mergers, acquisitions, or restructurings, all need to seriously consider the impact of tax reform.
Food manufacturers must also think about the ripple effects of tax reform. For example, they should give thought to how their target consumer base will be impacted by individual tax reform and how, if at all, that might impact demand.
Overall, tax reform should allow food and beverage manufacturers to reinvest capital in US-based operations, improving product quality via equipment and facility upgrades, and creating more jobs. But at the end of the day, each individual food and beverage company will need to determine the best path forward based on their individual sets of facts.
FE: What does repeal of the corporate AMT mean for food and beverage manufacturers?
Schreiber & Simmens: Repeal of the corporate AMT means that businesses will likely be able to reduce their effective corporate tax rate lower than 21 percent.
FE: What types of food and beverage manufacturers will most be impacted (small or mid or large, or all)? Why?
Schreiber & Simmens: The tax reform bill will affect all food and beverage manufacturers, no matter the size. We can make generalizations about the winners and losers, but the impact will be different for every business, based on legal structure, capital structure, geography, business objectives, etc.
For more information and to see BDO’s tax reform checklist, visit https://www.bdo.com/insights/tax/federal-tax/bdos-tax-reform-resolutions.