Tom Murphy, executive vice president of RSM McGladrey's Manufacturing and Wholesale Division answered some questions about the Tax Reduction and Reform Act 2007.
Q: On October 25, House Chairman Charles Rangel introduced the Tax Reduction and Reform Act 2007. How does this tax reform bill affect the manufacturing industry?
A: This is major, wide-ranging tax legislation. It tackles a number of topics, including a repeal of the alternative minimum tax, various tax cuts for families and U.S. businesses, and investment funds' carried interest, just to name a few.
Manufacturers could be affected in any number of ways -- as of right now it's unclear exactly what the impact will be until we have more time to analyze the legislation. As the bill currently stands, it would significantly reduce the top corporate marginal tax rate, to 30.5% from the current 35% level. Yet, the legislation would also curtail certain corporate tax benefits in order to offset the cost of the tax cuts. These include the repeal, amongst other things, of the domestic production activities deduction -- which has provided manufacturer's with considerable tax savings.
Q: Why is this tax code such a huge concern for manufacturers?
A: American manufacturing is really struggling to keep its competitive edge because of the rising cost of doing business at home. U.S. manufacturers are already at a huge cost disadvantage compared to our international trade partners. The corporate tax burden has been by far one of the largest contributors. Statutory rates have remained unchanged in recent years in the U.S., while other trading partners, such as Mexico, Japan and South Korea, continue to lower their rates by comparison, which further erodes our global competitiveness.
Q: What about small manufacturers organized as S-corporations or other 'pass-through' entities? How will this affect them?
A: In terms of the overall impact of the tax code on all businesses, whether S-corporations or not, more analysis of the bill will be required to really determine the answer. However, smaller businesses setup as S-corporations are exempt from corporate federal income tax and wouldn't receive the kind of relief from this bill that regular C-corporations would. In an S-corporation the taxable income flows through to the individual shareholders and is taxed at individual tax rates. A more onerous tax burden for these individuals means less money would be available for business reinvestment in new equipment, technology, product development and for entering new markets. Small businesses like this are the economic engines of the manufacturing industry, so it is very concerning.
Q: Rangel's tax reform proposes a cut in corporate taxes funded by curtailing manufacturing industry tax benefits. What is likely to be the net result? Will the increases exceed the relief?
A: The answer is that we just don't know yet. The National Association of Manufacturers (NAM) is certainly concerned about this and we will be following this issue closely as it develops over the next few weeks. Currently, however, there is just not enough information or analysis available for us to be in a position to draw conclusions.
Any time that we can reduce the net tax rate, that is a positive in my mind. It just allows us to be more competitive globally. At this point, however, the overall tax outcome is unclear. Interpretation just doesn't happen overnight. There is going to be a lot more interpretation and discussion in the wake of this bill.
Tom Murphy is executive vice president of RSM McGladrey's Manufacturing and Wholesale Division. RSM McGladrey is a professional services firm providing accounting, tax and business consulting. http://www.rsmmcgladrey.com