Congress hid an Easter egg in the Omnibus Appropriations Act of 2016. Actually, the special feature is right out in the open, and it can be cracked in time for tax season this spring. The surprise? The new law made permanent the federal tax credits for a manufacturer’s investment in capital equipment and R&D.
And it kicks in now — a welcome development for bakers and their suppliers getting ready for the International Baking Industry Exposition (IBIE) that takes place Oct. 8-11 at Las Vegas.
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. And often, a year or more would elapse 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.
“This will be a nice fit for a lot of bakeries, especially coming up on IBIE this fall,” he continued. “It will help open the checkbook a little wider.”
In high-tech jargon, an Easter egg is an unexpected or undocumented feature in a piece of computer software or on a DVD, included as a joke or a bonus. Section 179 of Public Law No. 114-113, however, is no joke.
It allows 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 includes a ceiling of $2 million for qualified purchases and 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.”
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.”
Alpha Baking’s R&D lab does a lot of work for the company’s private-label customers. “We use such credits extensively,” Mr. Marcucci said. “It’s nice to know it’s now permanent. In the past, it was hard to keep track of what documentation was required, how long to keep it and whether to keep it at all.”
The $1.1 trillion omnibus bill passed right before Congress adjourned at the end of December, clearing the House first and then the Senate within a few hours of each other.
The end of session for Congress was a busy two weeks, and many of the bill’s provisions got a lot of buzz from the business world. These included extending the Affordable Care Act’s deadline for the so-called Cadillac tax on high-benefit health plans and rescinding the Country of Origin (COOL) rules for labeling of meat products. Additionally, the act passed as a bipartisan effort, which all by itself was a newsworthy event for the contentious 114th Congress.
Incorporation of what came to be known as “the tax extenders package” was far less glamourous and received much less coverage.
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. “Most recently, it was enacted in the recession around 2008 or 2009 to jump-start investments in tangible capital goods by business.
“Before this bill, such tax credits were extended every year, along with 50 or more other provisions,” he continued. “The collective measure enjoyed bipartisan support — something for everyone.”
Dave Van Laar, a former bakery executive and now president of the Biscuit & Cracker Manufacturers’ Association, observed, “We took advantage of these [tax credits] several times when I was on the baking side. But it was always, ‘What will happen next year? Will it be extended?’ This change is good news.”
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.”
The most generous aspects — the half-million credit and the added 50% bonus depreciation deduction — are in place just in time for IBIE. “The timing of this couldn’t have been better with IBIE just a few months off,” Mr. MacKie said. “Bakers can now come to the show knowing that tax credits for equipment investments will be permanently stable.”
Mike Cornelis, vice-president, international sales, American Pan, a Bundy Baking Solution, and chairman of IBIE 2016, 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 run.
“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 their efforts to better serve their customers — and eventually the end consumer — through more effective and targeted R&D initiatives.”