The Impact of Changes to TCJA Provisions on the Manufacturing Sector
12 September 2024
BY: CHRISTIAN SNYDER, CPASince its enactment in 2017, the Tax Cuts and Jobs Act (TCJA) has been a cornerstone of U.S. tax policy, introducing significant changes aimed at boosting economic growth and investment. However, several key provisions of the TCJA, pivotal to business operations and succession planning, will change or are set to expire, posing challenges to the manufacturing sector. Among these provisions are the expiration of the Section 199A deduction as well as reduction to both the Foreign-Derived Intangible Income (FDII) deduction and the estate tax exemptions.
Given the upcoming U.S. Presidential election in November 2024, tax policy is subject to change and these favorable provisions could be extended. However, manufacturing companies are already feeling the unfavorable effects of the mandatory capitalization of research and development expenditures and the changes to the provisions discussed below will create additional tax burdens.
Section 199A Deduction: A Loss for Pass-Through Entities
One of the most impactful provisions of the TCJA was the Section 199A deduction (or qualified business income “QBI” deduction), which provides a substantial tax break for pass-through business owners. This deduction aims to indirectly stimulate investment and growth among small and medium-sized manufacturers and allows eligible business owners to deduct up to 20% of qualified business income, potentially decreasing their effective tax rate on business income from the highest marginal rate of 37% to 29.6%.
Losing this deduction in 2026 could mean higher tax liabilities and reduced cash flow for reinvestment, impacting decisions on expansion, hiring, and capital investments for pass-through business owners.
Foreign-Derived Intangible Income (FDII) Deduction: Impact on Export-Oriented Manufacturers
The FDII deduction is intended to incentivize U.S. C corporations with heavy exports, including manufacturers, to keep intellectual property and production in the United States, while creating a more tax-competitive environment. FDII provides a preferential tax deduction on income derived from exports and certain foreign sales. However, under current enacted law, the FDII deduction is scheduled to decrease from 37.5% to 21.875% for tax years beginning on or after January 1, 2026, leading to higher effective tax rates and making it more difficult to navigate an increasingly competitive global market for manufacturers with significant exports.
Businesses leveraging the benefit of the Section 199A Deduction or benefitting from the FDII deduction should soon meet with tax advisors to consider tax planning, including accounting method changes to accelerate income, to maximize permanent tax savings and mitigate these changes timely and effectively.
Estate Tax Exemption: Implications for Family-Owned Manufacturers
Under the TCJA, the estate tax exemption was doubled, significantly reducing the number of family-owned manufacturing businesses subject to estate taxes. This change has allowed business owners to plan succession and generational transfers with greater certainty and fewer tax burdens. However, the estate tax exemption will revert to pre-TCJA levels at the end of 2025, potentially exposing more manufacturing business owners to substantial estate taxes upon generational transfers.
Family-owned manufacturers should also soon meet with their tax advisors to coordinate estate planning strategies to mitigate potential tax burdens upon succession. Business owners that wait may find that professional service firms (accountants, attorneys, and valuation professionals) will be extremely busy in 2025 should the higher exemption expire, therefore making it imperative to begin planning now to avoid the rush.
Impact on Manufacturing Sector
In response to these changes to the TCJA provisions as currently enacted, the manufacturing sector is likely to face increased complexity and uncertainty in tax planning, further complicating strategic business initiatives and influencing decisions that could otherwise drive business growth. Similarly, family-owned businesses face renewed challenges in succession planning, potentially altering ownership dynamics.
We anticipate that policymakers will deliberate the future of these tax provisions after the election later this year. Manufacturing leaders must remain vigilant and proactive in assessing these changes, as currently enacted, and engage with tax advisors crucial to navigate these changes effectively.
For more information, please contact:
Christian Snyder, CPA - Tax Principal
