Fairy Tale

When Fairy Tales and Tax Law Collide

Once upon a time, manufacturing companies in the US got a tax deduction for exporting their manufactured goods to other countries. This was good because wages in America are high compared to other countries. The WTO (World Trade Organization) decided that this policy wasn’t fair to manufacturers in other countries, and so the rules were changed. The new rules allowed for a deduction of (generally) 9% of the value of all goods manufactured in the US against income tax. This was deemed fair by the WTO because both domestic and foreign manufacturers were treated equally and because it allowed the deduction for foreign companies investing in US jobs, plants and equipment.

The new tax bill has eliminated that section and replaced it with a new law: Section 199A. This highly complex law replaces the relatively simple Qualified Production calculation with a much more intricate set of rules. In essence, it amounts to this:

1) Corporations will now be taxed at 21% rather than 35% on taxable income.

2) Pass-through entities like S-Corporations, LLCs, sole proprietorships and others will be able to take up to a 20% deduction from their pass-through income, subject to certain limitations.

The plain language of the law seems to indicate that most service providers will not qualify for the deduction, and that most manufacturers will qualify. A close reading of the text of the law seems to indicate that some service providers may also qualify. However, it remains to be seen whether the regulations that are soon to be issued by the Treasury will support that interpretation.

It remains to be seen whether the big bad wolf will prevail.

As always, we stand ready, willing and able to help you navigate the ever-changing rules and regulations. Our mission is to help keep engineering and manufacturing jobs here, and to help bring distant jobs back! Call us today!

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