Tax credits for R&D permanently extended
August 15, 2016
by Laurie Gorton
The Omnibus Appropriations Act of 2016 includes a permanent extension of tax credits for capital equipment and R&D.
This past Christmas, the feds gave bakers — indeed, all US manufacturers — a huge gift: permanent extension of tax credits for investing in capital equipment and R&D. That means you can write off as much as $2 million annually for qualified purchases.
In late December, Congress passed the Omnibus Appropriations Act of 2016. The bipartisan measure got an immediate signature from President Barack Obama, allowing it to go into effect for 2015, too.
Over the years, many similar appropriations and tax laws included credits and deductions for such investments but always for a limited period, usually two to five years. When the time limits ran out, industry and legislators scrambled to reinstate the write-offs. Often, a year or more would go by before the tax credits returned.
“With the credits being made permanent, you can know what the rules are,” said Larry Marcucci, president and CEO, Alpha Baking Co., Chicago. “It’s frustrating to run a business when the rules keep changing. It’s great news to have the credits be made permanent.”
The law also affected tax credits for R&D. “Every two or three years, we’ve had to get this extended,” said Robb MacKie, president and CEO, American Bakers Association (ABA). “It’s a nice bonus to have it made permanent.”
It’s easy to see the gains to be reaped by bakers now getting ready to attend IBIE. “This will be a nice fit for a lot of bakeries, especially coming up on IBIE this fall,” Mr. Marcucci said. “It will help open the checkbook a little wider.”
Michael Cornelis, chairman of IBIE 2016 and vice-president, international sales, American Pan, a Bundy Baking Solution, noted that attendees and exhibitors will benefit due to the continued tax savings and other incentives offered in the omnibus law. Such incentives help bakers and food manufacturers justify purchases that can improve their operations in both the short and long runs.
“It’s going to be a potentially huge windfall for those companies that are looking to invest in baking equipment to improve their operations,” Mr. Cornelis said. “It will enhance [bakers’] efforts to better serve their customers — and eventually the end consumer — through more effective and targeted R&D initiatives.”
Mr. MacKie agreed. “We are very excited about the tax extenders package that passed at the end of 2015,” he said. “It was very helpful to make these permanent, particularly the R&D and capital expenditures. We anticipate this will be very helpful as bakers come into IBIE with their reinvestment plans.”
ABA participated in the National Association of Manufacturers’ efforts to shepherd this provision through the lawmaking process. “ABA was pleased to be able to support this effort,” Mr. MacKie said. “It’s big for the bakers and the equipment suppliers. It will help our companies with their capital expenditures planning.”
Although this is not the first time for such tax credits, it is a significant step. “Expensing for capital investment is not new,” observed Nick Pyle, president of the Independent Bakers Association (IBA). “Most recently, it was enacted in the recession around 2008 or 2009 to jump-start investments in tangible capital goods by business.”
How they work
The omnibus spending bill, now Public Law No. 114-113, changed US tax code by rewriting 26 USC 179 to give a deduction of up to $500,000 on a dollar-for-dollar basis for purchases of capital assets used in a trade or business. It included a ceiling of $2 million for qualified purchases, which can be taken on new or used property. An important limit is that the business must have taxable income to take the credit; none is extended to businesses in loss positions.
Another part of the law is a schedule of additional depreciation given for the purchase of new capital assets valued above the $500,000 allowed by the Section 179 tax credit. (Used property is excluded.) It starts with a 50% bonus allowance for assets placed in service through 2017, 40% for 2018 and 30% for 2019, the last year for the bonus. The benefits are effective for 2016 and retroactive for 2015.
“We are very positive about investing in our facilities,” said Giancarlo Turano, owner, Turano Baking Co., Berwyn, IL. “If anyone is looking at expanding, using the credit makes sense. Does the new provision make a difference in whether or not we’ll invest? No. But it makes it much easier when we’re able to write down 50% of those costs.”
To sort out the details, Mr. Turano, Mr. Marcucci and others recommended consulting a good tax adviser.
“For many large bakers, the half-million dollar credit might not seem as significant,” said Dennis Gunnell, vice-president, sales and marketing, Formost Fuji Corp. “But for smaller companies, intermediate bakers and even retail bakers, this is a real benefit. That deduction can make a big difference.”
And that difference applies to the allied trades as well. “The permanent tax credit makes buying easier for our customers, but it also applies to when we invest in new equipment to build our equipment better,” Mr. Gunnell explained.
“Anything that makes life better and business more profitable for our customers also makes things better for us,” he added. “What’s good for the baker is good for us.”
One thing to remember, however, is that permanent means permanent, or at least as long as the legislators say it is. “Another Congress could change this back,” Mr. Gunnell said. “But the situation today is better than what’s been happening in the past few years where the credits had to be reinstated periodically so they wouldn’t run out.”
Baking’s wish list
Changes in these tax credits may be just the tip of the iceberg when it comes to US tax policy. Baking industry associations have big goals when it comes to federal tax reform, but they also have big questions, especially in this very rancorous election year.
“Despite the political climate, bakers and their supplier partners are eager to see broad corporate tax reform,” Mr. MacKie said. “This would include a lowering of corporate tax rates, including tax rates for family businesses that file under the individual tax code, lowering of capital gains rates and eliminating the estate tax permanently. At the very least, a simpler business tax code would be much appreciated.”
Such change is overdue. Mr. MacKie said that it’s been 20 years since the last time comprehensive reform of the tax code was enacted. “Think about it from this perspective, since the 1996 tax reform bill passed, the Internet was invented, social media were launched, the iPhone created, and NASA operated a remote-controlled rover on Mars,” he said. “The US tax code is woefully out of date, and it is hurting US competitively in the world, including bakers and suppliers.”
There may be other incentives waiting in the wings. Mr. Pyle noted that trade bills involving both the EU and the Pacific Rim region would reduce tariffs on imported ingredients. He also stressed the importance of ending subsidies to domestic sugar producers, which he described as “the hidden tax on sugar that has US bakers paying two to three times the world price for sugar.” IBA has long demanded action on this issue.
All the same, it’s a safe bet that tax credits given to manufacturers for capital investment and R&D will long be part of the US tax code. Popular with politicians of all stripes, such incentives have been used frequently in the past to stimulate spending by the manufacturing sector of the US economy.
IBIE attendees will want to catch Lee Sanders’ presentation, “Governmental Affairs Update,” set for Sunday, Oct. 9, starting at 11:00 a.m. Ms. Sanders is ABA’s senior vice-president, government relations and public affairs. Also, IBA will review various government issues at its fall meeting to be held during IBIE.