Tax reform is a hot topic in Washington, D.C. and so today the FABTECH blog is introducing “Tax Reform Tuesdays.” Each Tuesday, our blog will highlight a tax reform issue that is important to manufacturers. We’ll have guest bloggers and the latest on the tax reform chatter in DC.
Since last year, Congressional leaders and the White House have expressed interest in undertaking the most significant comprehensive reform of the U.S. tax code since 1986. While the passage of comprehensive tax reform legislation is far from certain, the potential impact of such legislation on manufacturers makes it one of the top policy issues to watch for our sector.
The White House has already proposed The President’s Framework for Business Tax Reform. The Proposal would cut the top corporate tax rate on manufacturing to no more than 25%. However, in return, the proposal calls for the elimination of several popular tax breaks that manufacturers use. In addition, the President’s proposal includes only C Corporation tax reform which would not cover the majority of small manufacturers in the country (many manufacturers are organized as S Corporations).
The top Democratic and Republican leaders of the Senate Finance Committee announced they are approaching tax reform as a blank slate – without tax deductions, credits, or other provisions used by manufacturers and other businesses. Senators have until July 26 to send the Senate Finance Committee a list of tax provisions, credits, and deductions they would like included in tax reform and justification for inclusion.
Today to start off our Tax Reform Tuesdays, top manufacturing lobbyist Omar Nashashibi, who was a panelist at FABTECH in Las Vegas, takes a closer look at one of the most important tax deductions for manufacturers: the Section 179 Equipment Expensing Deduction.
By Omar S. Nashashibi
Our employees are the most important part of our business. This is the statement we hear most often from manufacturing businesses. After all, it takes people to run the machines which make the parts that run the planes, trains, automobiles…and fighter jets.
However, it is usually the machines we buy to make the parts which have the largest upfront and investment costs to a business. Equipment that manufacturers purchase can run from the tens of thousands of dollars into the millions for many in the metalworking industry. Especially for a small or medium sized manufacturer, this means securing a loan or some other method to finance the purchase of capital equipment. It also means long-term planning on the part of a company who often develops the following year’s business plan at least twelve months in advance.
But how can a small business plan when the tax rules are constantly changing and they cannot calculate how much purchasing a new machine will actually cost a manufacturer? The Research and Development Tax Credit has expired fifteen times since the 1980’s, leading to investment uncertainty. Bonus and Accelerated Depreciation fluctuates from 100% to 50% deductions, and Section 179 is hanging in the balance yet again.
The Section 179 Equipment Expensing Deduction is one of the most important tax provisions used by small and medium sized manufacturers. Under current Section 179 Equipment Expensing laws, businesses may immediately expense up to $500,000 on equipment costing below $2 million. While Congress extended this expanded Section 179 through the calendar year, on December 31st, 2013, manufacturers are yet again facing an expiration of the provision at those levels.
How do you plan? How do you budget for next year’s equipment purchases? How can you hire more employees to run the machine if you don’t know when you’ll buy it? While tax policy alone will not drive a manufacturer to buy new equipment, it certainly makes a difference in the timing of the purchase. And Washington knows this. Why do you think Washington inserted an expanded Section 179 provision in the stimulus law several years ago? They know it changes business behavior and would “stimulate” large purchases.
While lawmakers in Washington, D.C. are patting themselves on the back for extending Section 179 for another year, they do not recognize a business needs more stability and must plan ahead for these kinds of acquisitions. Washington tends to act in crisis mode – procrastinating worse than any college student but with trillions of dollars and millions of jobs at stake.
For thousands of manufacturing businesses, the Section 179 Expensing Deduction and other capital equipment tax provisions are a top priority. As one of the leading lobbyists on tax reform for manufacturing businesses, I speak with lawmakers and their staff almost every day. Nothing has a greater impact on elected officials than the promise of adding more jobs or increasing worker hours.
What better way to increase employment than to buy more equipment which takes new hires to run? This stimulates the economy by generating employment in the machine building industry, creating more jobs among manufacturers who purchase the equipment, and adding to the roles of customers buying and selling the product manufactured.
This is where we run into problems. Washington cannot get its act together. Each year, a group of tax lobbyists like myself have no choice but to run to Capitol Hill asking for yet another tax credit or deduction extension set to expire December 31st of that year.
Unfortunately, the Section 179 Equipment Expensing Deduction is at the top of the list of deductions tax lobbyists have to ask Washington to extend every year, but it should not constantly be on the verge of expiration. If Washington really wants to incentivize the purchase of new equipment, it must provide stability for manufacturers who must plan years and months in advance before purchasing new machines and hiring more employees.
Congress has amended the U.S. tax code over 5,000 times since the last major overhaul in 1986, creating a patchwork of loopholes, expiring provisions, and most importantly, instability. This instability makes it nearly impossible for a business owner to plan, which is why lobbyists like me are working with members of Congress on behalf of manufacturing companies and associations – but where do we go from here?
There is no question that in tax reform, Congress needs to clean up and eliminate many special interest loopholes created over the years. And there is no doubt some would consider the Section 179 Equipment Expensing provision as another special interest giveaway. However, the “special interests” benefiting from the Equipment Expensing provision are not only the 12 million manufacturers employed in the U.S., but also the millions throughout the supply chain who help finance, build, and sell capital equipment and the millions more who purchase goods manufactured domestically.
While manufacturers in varying industries hire people like me to lobby on tax reform, the people with the most influence over Congress are still the voters – and manufacturers – from around the country. The Senate tax-writing committee announced last month it is starting with a blank slate and it wants other Senators to offer input into the tax reform process. The House tax-writing committee is several months ahead of its Senate counterpart and may release a draft tax reform bill in the coming months.
Regardless of the timing, manufacturers of all sizes must have a seat at the table when negotiating tax reform. The Section 179 Equipment Expensing provision is a clear example of why we need stability in our tax code. Washington can take some concrete steps to strengthen manufacturing in America. Tax reform that includes a robust Section 179 Equipment Expensing Deduction is a fundamental step in the right direction.
On behalf of all our manufacturing clients, we are encouraging them to weigh in with their U.S. Senators and Representatives about the impact of tax policy on their companies. This debate is not just about what rates companies pay, but also how we can make the tax code more efficient and less burdensome on manufacturers. In the end, we must make sure the government can pay its bills but also ensure tax policy increases employment, frees up capital for equipment purchases, and creates stability and simplicity in the process.
Omar S. Nashashibi, a Founding Partner with The Franklin Partnership, is a leading tax policy lobbyist and government affairs consultant based in Washington, D.C. representing manufacturing businesses and trade associations. For more information, visit: www.franklinpartnership.com
Tax reform will be a major topic of discussion as leaders from all aspects of U.S. manufacturing convene in Chicago November 18-21 for the FABTECH Expo. For more information, visit http://www.fabtechexpo.com/.
To learn more about the FABTECH event, you can also:
- Register to receive an email when show registration opens
- Find a hotel in Chicago
- See who is exhibiting at the show
- Learn how to reserve exhibit space and download an application
- Find links to FABTECH Mexico and FABTECH Canada
- and (of course) access this FABTECH blog.
and much, much more.