income, which is defined as the taxable income of
the manufacturer. However, it excludes any business
interest income of the company, any net operating loss
of the company, and any depreciation or amortization
deductions of the company.
The 30 percent deduction applies to manufacturers
that are corporations, and there are special rules for this
provision that apply to pass-through businesses and their
owners. Also, any disallowed interest expense under this
30 percent provision is carried forward indefinitely. Finally,
this provision does not apply to smaller manufacturers, as
there is general exception for a “small business” (defined
as a business with gross receipts of less than $25 million).
Important Tax Incentives Retained By Law
In addition to analyzing all the changes made by
the new tax law, it is also worth noting the several
important tax incentives that were not eliminated as
part of the final legislation. There was speculation and
discussion that the following items could be removed
or limited in exchange for tax rate reductions, but they
were not part of the final tax bill, which is a positive for
manufacturers and distributors.
LIFO Inventory. The “last in, first out” inventory
method was preserved. Many manufacturers with rising
costs have utilized LIFO over the years to provide much
needed capital for their business.
Research (R&D) credit. The research credit has been
increasingly used by manufacturers as they strive to
develop new products and processes to stay competitive
in the marketplace. The law did not alter the credit in any
way. As a result, manufacturers should continue to analyze
and document their research efforts and seek to take full
advantage of this key credit.
IC-DISC. The IC-DISC offers a tax incentive for
manufacturers that export their products out of the U.S.
This opportunity for tax savings was not changed by the
law, but the net potential tax savings are slightly less due
to the new lower tax rates.
The law could also have a significant impact on
manufacturers and distributors that have extensive
international operations or holdings. There were
wholesales changes in the overall tax regime for
international tax matters, and several of these changes
are phased in over a number of years. Any affected
manufacturers or distributors should carefully review and
address the tax impact these changes may have on their
businesses in near-term and beyond.
Overall, the impact of the new law should be favorable
for the industry. However, given the multitude of
provisions that will directly impact manufacturers and
distributors, it’s important that company leaders work
with their tax advisers to closely evaluate the law and
identify relevant new requirements as well as ways the
law can benefit their businesses.
Jim Brandenburg, CPA, MST, is a tax partner at
professional law firm Sikich.