New Tax Reform’s Impact on Closely Held Manufacturing Businesses
The 2017 Tax reform bill will have an impact on almost every business and taxpaying individual; and perhaps more so on the closely held manufacturing business.
Of specific interest to the manufacturing community is that the tax reform bill:
- Reduced the corporate tax rates to 21%;
- Repealed IRC sec 199 Domestic Production Activities Deduction and replacement with Sec 199A “Qualified Business income Deduction”, which may allow for a reduction of taxable income from pass-thru entities (partnerships, LLC’s, S Corp’s, Sole proprietorships);
- The elimination of Sec 263A “Unicap” when sales are less the $25 million.
Of equal significance to exporters of US sourced goods is that the reform bill left the IC-Disc benefit in place. An IC-Disc (Interest-Charge Domestic International Sales Corporation) is a separate entity that receives a commission from the exporting entity, which is then taxed at a reduced rate as a qualified dividend to the owner of the IC-Disc. The IC-Disc does NOT pay any tax.
The new tax may also have an impact when the business owner also owns the building and property used by the manufacturing activity, as well as any other commercial real estate activities.
The various tax potential benefits indicated above are highly dependent on the tax and ownership structure of the manufacturing enterprise.
Furthermore, there are very serious tax effects and compliance issues in the new tax reform bill when there are any foreign owners in the business, or if US citizens have ownership in foreign entities.
It is critical that the accountant and other professionals involved understand the individual owner’s tax and estate planning factors to ensure no unintended consequences result from any change in entity’s structure to take advantage of any benefits resulting from the tax reform.
Please contact me with any questions you may have regarding these new changes and their potential effect on your individual and business tax.
Steven Bortnick, CPA