The second part of our Manufacturing Alliance event at Rockland Immunochemicals on June 21 covered changes caused by the recently passed tax law.  The Manufacturing Alliance tapped two Tax Accounting experts from our service provider network to answer questions and share insights on how the new tax reform laws affected manufacturing companies in our region.  Roy Kershaw, tax partner at Baum, Smith & Clemens and Carlo Ferri of Kreisher-Miller agreed that the new tax law will have a significant impact on how taxes are handled going forward but way too many questions remain unanswered, so any predictions on what and how to react to those changes is a guessing game at the moment.

Details for New Tax Law Still Unclear

The IRS has committed to a comprehensive publication of individual rulings related to a broad range of topics by mid-year.  This will be first real peak into the direction and focus of the IRS’s attention.  Many of the manufacturing companies that hired these two firms learned that they probably waited too long (November/December 2017) to react to opportunities presented to them by the law changes.  However, the willingness to get involved in planning early this year has been severely restricted by the slow pace of IRS rulings. The volume of changes from the new tax law is overwhelming an effect everyone differently. Each entity requires customized strategies based on type of business ownership, previous year deductions and future shelter opportunities. Still, it is better to talk with your tax experts now and be prepared when the guidelines are issued.

Business Tax Law Experts Answer Questions

Roy and Carlo have also agreed to address several tax law questions submitted by our Manufacturing Alliance business leaders. Here are the answers to some of the questions that were posed:

Q: Does the handling of interest/deductions on a Line of Credit loan change?

A: For individuals, interest on home equity lines of credit will no longer be deductible unless the proceeds are used to buy, build or substantially improve the taxpayer’s home that secures the loan. Generally, for a business whose average annual gross receipts for the three previous years exceeds 25 million, the interest deduction will be limited to 30% of adjusted taxable income.

Q:  Have tax treatments for alimony payments changed?

A:  Yes for federal income tax purposes alimony won’t be deductible by the payor or incurable in income by the recipient for post 2018 divorce or separation agreements.

Q:  When will tax preparation and filing get simpler?

A:  For some taxpayers filing will get simpler this year. The expanded standard deduction for individuals will cause more taxpayers not to itemize. For businesses with less than 25 million in revenue the new law has given relief in several areas including the use of the cash method of accounting and the need to account for inventory.

Q:  What has changed regarding charitable gifts tax deductions?

A:  The increased standard deduction has some charities worried that year end tax planning giving may be impacted. On the positive side the charitable deduction limitation has been raised to 60% of adjusted gross income from 50%.

Q:  Are estate taxes handled differently at the Federal level and at the PA state level?

A:  Yes, at the federal level there is a 40% tax on taxable estates that have a value over $11.2 million per person or $22.4 million for a married couple.  Pennsylvania has an inheritance tax.  The tax is imposed as a percentage of the value of a decedents estate transferred to beneficiaries.  The tax varies between 0%-15% depending on the relationship of the heir to the decedent.

Q:  How are losses from the previous year(s) handled now?

A:  C-corporations can no longer carryback any net operating losses under the new law. They must carry them forward but can only offset this against 80% of taxable income in a given year.  For individuals that receive a loss from a business, they can only deduct up to $250,000 if unmarried and $500,000 for married couples.  The excess loss can no longer be carried back and can only be carried forward.  The carry-over loss can only offset 80% of the taxable income in future years.

Q: What are some of the changes that effect employee compensation packages?

A:  Benefits related to transit passes and parking are no longer deductible by the employer.  The deduction for moving expenses was also eliminated. Cash, cash equivalents, gift cards, vacations, meals, and tickets to sporting events no longer qualify as employee achievement awards. Also, certain stock option recipients will be able to defer income recognition for up to 5 years after vesting.

Q:  Are ESOP’s or other employee ownership plans better off under the new law?

A:  Two areas that will impact ESOP are the valuations on the purchase obligation and the limitation in interest expense.  With the reduction in the tax rates, valuations have increased which in certain circumstances have increased the future purchase obligation.  Also, leverage ESOP buy-outs where the company is a C-corporation or partial-owned S-corporation could run into limitations in being able to deduct the interest expense.

Q: Is tax avoidance planning easier under the new law?

A:  No, it more complex especially if you have foreign operations with the introduction of new types of foreign taxes and limitation on foreign tax credits.  On the domestic side, the new 20% deduction is complex and not all businesses will qualify for this deduction.  Additional compliance time will be incurred with the new taxes and forms to prepare which will add to increased preparation time.