How to Invest Your New Corporate Tax Savings in Smart Manufacturing

Starting in 2018, the corporate tax rate will be dramatically reduced from 35 percent to 21 percent. Since the new tax law did little to close many loopholes, the effective corporate tax rate will be even lower. Josh Bivens, Director of Research at the Economic Policy Institute, estimated that “the effective rate will all but surely dip below 15 percent and get close to 10 percent.” He referenced an analysis from the Wharton School’s budget model that the effective average corporate tax rate will be around 9 percent in 2018 and then increase to 18 percent by 2027. *

As a rule, companies that generate the great majority of their profits in the United States will benefit the most. That is because they currently pay the highest effective tax rates.** According to Scott Greenberg, a senior analyst at the Tax Foundation, the tax bill will allow companies to write off all the money used in investments against taxes in just one year, instead of spreading out those benefits over several years. This benefit will be in effect for five years and then gradually phased out. “Tax changes that lower the cost of investment cause companies to make more investments — to buy more machinery, to put up factories, to purchase more equipment,” Greenberg said.***  So it makes sense to move ahead this year to make investments, especially since the tax laws could change once again if the Democrats regain control of Congress and the White House.

When choosing between expensive capital equipment and subscription services such as software and hardware as a service, consider the traditional return on investment (ROI) requirements that the investment should pay for itself in two to three years. Buying capital equipment comes with the risk that the promised savings do not materialize for a wide variety of reasons. One of my clients made a major investment in a state-of-the-art automated machine to replace much older, slower, but reliable machines. It was the most expensive machine they ever purchased. The new machine never lived up to expectations and may take many years to achieve its ROI.

Now consider the very low-risk alternative of subscription services in which you ‘pay-by-the-drink.’ These agreements do not typically require any capital investments, and are usage based. With subscription services, you only pay for what you need, and can add gradually as you see the services working, instead of the classic need to take a leap of faith on a significant investment that is unproven in your operations. Another benefit is that software or hardware needs to be replaced or upgraded, the provider takes care of it without any additional fees to the buyer.

In conclusion, the new tax law will free up a great deal of money for companies to put back in their companies. Selecting a subscription service avoids large cash outlays and risks inherent in capital equipment or enterprise software. When investing in the rapidly advancing technologies of Smart Manufacturing and the Industrial IoT, subscription service investments make even greater sense. Make it your New Year’s resolution to have at least a preliminary Smart Manufacturing initiative leveraging a subscription solution in 2018 – and Atollogy is here to make it a success.

 

Reference:

*Josh Bivens, http://www.epi.org/people/josh-bivens/

**Fortune Magazine, http://fortune.com/2017/12/16/gop-tax-bill-winners-and-losers/

***CBS News, https://www.cbsnews.com/news/corporate-tax-cuts-not-likely-to-raise-wages-growth/

 

Disclaimer: Atollogy and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Author:

Anthony Tarantino, PhD
Adjunct Professor, Santa Clara University – Operations and Finance
Six Sigma Master Black Belt, Certified Scrum Master, CPIM (APICS), CPM (ISM)
Senior Advisor to Atollogy

tony@atollogy.com