By Bridget McCrea
As Smith-Midland Corp.’s yearly Christmas employee luncheon was winding down, Ashley Smith, president and COO, stood up and made an announcement that made the whole room very happy.
“I thanked everyone for their hard work, and then told them that they’d all be getting $625 bonus checks,” Smith said. “A big cheer rang out. Everyone was pretty excited.”
One young worker who had only been working for the company for two weeks approached Smith and asked if he too was eligible for the bonus.
“’Yes, I told him,’” he recounts. “It’s for everyone.”
Smith-Midland’s idea of doling out a substantial year-end bonus can be traced back to the new tax law, which created a positive windfall for the precaster. Much like Home Depot, FedEx, and JP Morgan Chase have decided to use their tax surpluses to reward employees through bonuses, pay raises or a combination of the two, Smith-Midland has taken a similar approach to sharing the wealth with its employee base.
“We decided to pay it out during Christmas week, so that everyone had some extra cash to either save or spend,” Smith said. “Had it not been for the tax cut, it’s unlikely that we would have even done a bonus last year. And if we had, it would have been much smaller than $625 per employee.”
Sharing the surplus
Whether it’s due to the lower tax rate, the new depreciation rules, the treatment of pass-through limited liability corporation and subchapter-S entities, or any of the other adjustments made to the U.S. tax law in late-2017, many precasters will begin to feel the positive effects of the new tax law as early as this year.
Smith-Midland, for example, did some rough calculations in 2017 and determined that the new 21% tax rate would create a cash surplus. In today’s tight labor market – where finding and keeping good employees is becoming more challenging every day – the company decided to share that surplus with its most valued asset: its staff.
Smith said the company is also putting more money into training programs this year.
“We already do quite a bit of training, but this will give us even more resources with which to train our folks,” Smith said. “The tax cut will allow us to hire more people, invest in more technology and invest at least $500,000 more in capital expenditures with which to grow our business.”
Three key points
Particularly beneficial for small to mid-size businesses, the 2018 Tax Reform Law comes with several favorable changes that precasters will be able to take advantage of. Among them are these three key changes:
- Corporate taxation. The graduated tax rate structure for corporations, which used to top out at 35%, has been replaced with a flat rate of 21%. This will help reduce the tax liability for many C corporations. These cuts are permanent.
- Section 179 deduction. This tax deduction allows companies to deduct the full purchase price of qualifying equipment – either purchased or financed, during the tax year – and once capped at $500,000 (of the cost of qualified business property). With the new law, the deduction limit for Section 179 increases to $1 million for 2018. The limit on equipment purchases has increased to $2.5 million, and the bonus depreciation, which now also includes used equipment, is 100% and has been made retroactive to Sept. 27, 2017, and is good through 2022.
- Pass-through entities. The net income of partnerships, S corporations, LLCs and sole proprietors is effectively taxed at individual tax rates. The new law creates a 20% deduction (Section 199A) on income for pass-through entities, subject to certain limitations. The deduction applies only to qualified business income and can’t be claimed by taxpayers in service businesses, making precasters prime candidates to benefit from this new deduction.
The new tax law includes numerous other changes that will impact precasters, but the three outlined above will likely create the biggest positive impact for manufacturers in 2018. See, “A Guide to the Tax Changes,” at factcheck.org for a complete list of changes for both businesses and individual taxpayers.1
“This brings down tax rates for all individual businesses, and especially for companies with less than $315,000 in income, which will automatically qualify for the 20% small business deduction,” said Palmer Schoening, chairman of the Family Business Coalition and president of Schoening Strategies, a government affairs and economic consulting firm that advises associations and family businesses on tax policy.
Even precasters with higher income levels can qualify for the 20% deduction, said Schoening, as long as they can prove, for example, that they aren’t operating as sole proprietors.2 Schoening sees the 20% deduction and the new, lower corporate rates coming together to create an environment where precasters can afford to give pay raises and other bonuses to employees over the next few years.
A great time to buy equipment
If your precast plant needs an upgrade, or even just a new piece of equipment here or there, this is the year to dust off that plan of action and kick it into gear.
“It’s a great time to buy new or used equipment,” Schoening said.
Where different types of equipment were expensed over time using specific depreciation schedules, most of the equipment on a precaster’s wish list can be expensed in the same year it was acquired.
“This is a huge step in the right direction for manufacturers,” Schoening said.
NPCA President Ty Gable concurs, and said this new level of rapid depreciation, will likely push many precasters from the sidelines and into equipment acquisition mode.
“A lot of firms hold off on making capital expenditures and wind up patching that machine, patching that truck, or getting another year out of that piece of equipment,” Gable said. “Knowing that they can now depreciate a new or used purchase on a more rapid schedule will encourage more businesses to buy more equipment.”
The best news is that this movement will, in turn, help put more money in employees’ pockets and wind up boosting the U.S. economy as a whole – a trend that will positively impact the business world.
“Not only are employees going to be able to have more modern equipment to work with and bigger paychecks, but they’ll also be getting bonuses,” said Gable, who has been involved with industry lobbying and issues management for more than 40 years. “This new law is a win-win-win for our members. I’ve never seen a piece of legislation be this positive for small business.”
Leveraging the benefits
Your company may not have even filed its 2017 tax returns yet, but that doesn’t mean you can’t start thinking about how to fully leverage the new tax law.
“The first thing to do is sit down and talk to a tax professional or CPA and find out exactly what the changes mean for your firm,” Gable advises. “Look at how you can invest any financial wins back into your business and into your people, and then use those surpluses to your advantage.”
Schoening also tells precasters to consult the new payroll tax withholding tables,3 and then start communicating any tax advantages to their individual employees. Also, encourage employees to revisit their W-4 forms for 2018 to make sure they’re claiming the right number of deductions and addressing any other key details.
“This is important to do on both the public relations and human resource side of things as these benefits trickle down to workers,” Schoening said. “Everyone needs to know and understand exactly how the change in the law is affecting what they bring home to their families.”
Finally, both Schoening and Gable said precasters should assess their current, individual situations to determine what the best moves are – equipment purchases, corporate entity selections, employee bonuses or raises – for the year ahead.
“Everyone has to look at their own situations and figure out what’s best for them,” said Schoening, “knowing that investing in your business and your people are two of the best things you can do for the future of your business.”
Bridget McCrea is a freelance writer who covers manufacturing, industry and technology. She is a winner of the Florida Magazine Association’s Gold Award for best trade-technical feature statewide.
2 This is a particularly complex area of the new law that should be discussed with an accountant.
3 The 2018 Percentage Method Withholding Tables can be found in Notice 1036 at irs.gov/pub/irspdf/n1036.pdf.