Post-election tax insights for the manufacturing sector

With the Republican party having swept the United States House of Representatives, Senate and presidency, manufacturers across the country can expect to see significant changes in taxes, trade and tariffs. Traditionally, the Republican party favors lower taxes and deregulation, which may indicate a positive sign for the U.S. manufacturing sector.

The incoming administration has signaled an interest in using tariffs to accomplish its economic policies, potentially leading to some disruption in the supply chain. Some sectors, such as tooling and steel, may see benefits to this approach, but large OEMs may prefer a more free-market approach.

Historically, the GOP approach to tax policy has focused on reducing corporate income taxes, incentivizing domestic production and minimizing regulatory burdens. A prime example of this philosophy is the Tax Cuts and Jobs Act (TCJA) of 2017, signed into law by President Trump in his first term. The TCJA lowered the corporate tax rates on C corporations from 35% to 21% and lowered S corporation rates by lowering individual income tax rates and introducing a deduction on flow-through income. Under the new Republican leadership, there is a strong likelihood for the extension of these TCJA provisions and possible further tax reduction and incentives aimed at bolstering the U.S. manufacturing sector.

Proposed tax policy changes impacting manufacturers

• Reduction of corporate tax rates: During the election, one of the most talked-about tax policies was the corporate tax rate, with Vice President Harris calling for an increase to the corporate tax rate and Trump calling for reducing it. He suggests lowering the C corporation rate to 15% for companies manufacturing in the United States. This policy aims to enhance competitiveness and encourage reinvestment in U.S. operations. For manufacturers, this could mean substantial tax savings, allowing them to reinvest in their business through capital expenditures and job creation.
• Extension of bonus depreciation: The TCJA re-introduced 100% bonus depreciation, allowing companies to deduct the full cost of qualifying assets in the year they are placed in service. Beginning in tax year 2023, bonus depreciation began to phase down 20% per year, with manufacturers allowed a bonus depreciation rate of 60% in tax year 2024. Republicans are likely to extend this provision, increasing the bonus depreciation rate back to 100%, which has been a critical incentive for manufacturers looking to upgrade their plants and equipment. What’s unknown is whether Congress will make the change retroactively, a possibility being discussed by some in Washington. This extension, although considered unlikely to be introduced, would enable manufacturers to accelerate their investments in technology, equipment and infrastructure.
• Incentives for domestic production: Manufacturers should expect a renewed focus on tax and trade policies that incentivize and reward domestic production. This could include tax credits and/or deductions for companies producing goods in the United States and penalties for those outsourcing jobs overseas. Such measures aim to strengthen the domestic supply chain and create jobs, aligning with President-elect Trump’s protectionist policy goals.
• Changes to R&D expense treatment: The tax treatment of research and development (R&D) expenditures is critical for manufacturers focused on innovation, new product development and process improvement. Beginning in tax year 2022, manufacturers must capitalize their R&D expenditures and amortize them over the specified period (five years if the research is domestic, 15 years if research is performed outside the United States). While fixing this issue is bipartisan, Congress failed to deliver the last few years due to disagreements around the other provisions within the bill, namely the enhanced child tax credits. A Republican-led Congress may seek to revert to full R&D deductibility, providing an incentive for manufacturers to invest in R&D without the additional tax burden that currently comes with this investment.
• Tariff and trade: With the GOP win, manufacturers can also expect to see a continuation of protectionist trade policies. New or expanded tariffs are likely on imports, particularly from countries like China. While new and expanded tariffs could significantly increase costs for manufacturers relying heavily on imported goods, they may provide a competitive advantage to domestic producers, minus the increased costs of using foreign-made parts or materials.
• Prospect for deregulation: A cornerstone of President-elect Trump’s economic strategy is deregulation. Manufacturers could likely see a rollback on environmental regulations and a loosening of labor laws, which could lead to reduced costs and increased profits.
• Timing and use of budget reconciliation: While Jason Smith (R-MO), the likely returning chairman of the Ways and Means Committee, has already established committees and held hearings on the expiration of the TCJA, Congressional work and legislative drafting still remains. Over in the Senate, the Republicans will not have 60 seats, so using budget reconciliation is a must to pass tax legislation out of the upper chamber to avoid a Democratic filibuster. Budget reconciliation was used to pass both the Affordable Care Act and the TCJA, so the process is often used in recent history.

Implications for the manufacturing sector

These anticipated tax policy changes are certain to impact the manufacturing community in the following ways:

• Increased cash flow: Lower tax rates and extended bonus depreciation will likely increase domestic manufacturers’ cash flow. The additional capital can be reinvested into the business, leading to growth, expansion, hiring and innovation.
• Focus on R&D: With the possibility of more favorable treatment of R&D expenditures, manufacturers will likely prioritize innovation. Investing in R&D positions companies for long-term growth and maximizes the potential tax benefits, including the R&D tax credit.
• Strategic planning for new investments: With the potential for favorable tax treatment of capital investments, manufacturers are primed to strategically plan their capital expenditures. Investing in new technologies and equipment can improve the manufacturer’s throughput, enhancing the organization’s overall profitability and value.
• Navigating tariff impacts: Manufacturers must assess how potential tariff increases may impact their supply chain and costing structures. Companies that rely heavily on imported materials may need to explore alternative suppliers or discuss passing along the additional costs to their customers, if possible. Those expecting to gain from new tariffs would benefit from strategically planning how they will capitalize on what could be a competitive edge in the marketplace.

Preparing for the future landscape

As manufacturers contemplate these changes, many will find proactive planning beneficial. Here are several different strategies to consider:

1. Engage with tax professionals who understand the manufacturing sector and how forthcoming legislation can impact your business. This collaboration can help identify additional opportunities for tax savings and help ensure compliance with new laws and forthcoming regulations.
2. Scenario analysis can prove helpful in anticipating the financial impact of various tax policy changes. Understanding the impact of different tax rates, how research expenditures are treated and the rules around accelerated depreciation will affect cash flow and company profitability can inform strategic decision-making.
3. As tax incentives for capital investments become more favorable for the manufacturing sector, companies should consider the types of technology investments that will add to their strategic vision. Automation and digital transformation, in the absence of a steady labor market, can enhance efficiency and competitiveness, aligning with the goals of the new tax policies.
4. Manufacturers can influence policy, and engaging with policymakers to advocate for policies that make them more competitive can be impactful. By participating in industry associations and lobbying efforts, manufacturers can influence the direction of tax policy affecting the manufacturing sector.

How Wipfli can help

The future of tax policy for manufacturers is uncertain, but big changes are on the horizon. If your organization is ready to consider the potential implications of the incoming administration’s priorities, Wipfli can help. Our dedicated team of professionals combines real-world experience with deep industry knowledge, giving you a competitive edge in positioning for the future. Contact an advisor today, and get ready for the road ahead.