The folks in the supply chain management ecosystem are a pragmatic bunch. That pragmatism includes not allowing tax consequences to drive capital investment decisions. That said, many companies will find the tax bill about to be signed into law by President Trump amply rewarding, even if they don't invest a dime in capital equipment next year.
However, if they do spend a dime—or a lot more than that—they will find Uncle Sam to be more generous than he's been in the past.
The most sweeping tax reform bill in 31 years, which passed the House Tuesday, the Senate early yesterday morning, and the House again yesterday following a re-vote on procedural grounds, bestows significant benefits on businesses. Companies that are "C" corporations—which include all Fortune 500 companies and many small businesses—will be taxed at 21 percent starting in 2018, compared to the current range of 15 percent to 35 percent. The bill is a booster shot for smaller concerns that operate as "pass-through" entities. For example, most third-party logistics (3PL) warehouse companies are structured as pass-throughs, which means they pay taxes from business income and expenses on their personal tax returns. Those businesses stand to benefit both from a cut in most individual income tax rates and a 20-percent deduction on what the bill calls "qualified business income" from pass-through enterprises.
Businesses in service industries such as health care, legal, and professional services cannot claim the pass-through deduction. The deduction starts to phase out at certain income thresholds, and it is set to expire, along with most individual tax reductions, at the end of 2025.
The bill nearly doubles, to $1 million, the size of the so-called Section 179 expense deduction, which allows businesses to write off the full amount of equipment investments in the year they are made. The new law also increases to $2.5 million (from $2.03 million) the spending limits above which companies would be ineligible for the deduction.
In addition, all companies can fully deduct the cost of equipment purchases the first year the asset is placed into service. The major difference is that the Section 179 language is permanent, while the full depreciation benefit on all equipment purchases expires after five years. All of the new expensing provisions exclude investments in facilities such as warehouses and distribution centers, which are governed by different, and highly complex, depreciation schedules.
Pat O'Connor, an attorney for the International Warehouse Logistics Association (IWLA), which represents third-party public warehouse operators, said the new Section 179 spending caps represent a "true small-business tax incentive," because larger businesses that would normally spend above that threshold won't qualify for the deduction.
The Tax Foundation, which touts itself as the nation's leading independent tax policy research group, said in a report three days ago that the plan would spur an additional $1 trillion in growth over the next decade. Of that, $600 billion would come from the bill's permanent provisions and $400 billion from its temporary provisions, according to the group's forecast. The measure would add 0.29 percent to U.S. GDP over the next 10 years and create 339,000 full-time equivalent jobs, the Tax Foundation projected.
Not surprisingly, IWLA, most of whose members are structured as pass-through entities, is thrilled by what it has analyzed so far. The tax breaks granted to pass-throughs could incent IWLA members, who are normally cautious about spending, to loosen their purse strings, because they will have more capital to plow back into their businesses, Steve DeHaan, the group's president and CEO, said in a phone interview yesterday. Most IWLA members already re-invest available capital into their businesses, and the more favorable tax treatment will give them more reason to do so, especially as customers demand more services from their providers, DeHaan said.
"I see this as very positive for 3PL employees and leadership," DeHaan said. IWLA has not yet analyzed the impact of depreciation provisions on its members, he added.
On the transport side, where asset purchases are the norm, the ability to expense investments may free companies from being forced to give tax considerations as much weight in capital spending as they have in the past. The bill's language "will give transportation companies much more flexibility in making capital expenditures, permitting more of a focus on business reasons for such decisions rather than having to focus on tax consequences," James H. Burnley IV, Transportation Secretary under President Reagan and for many years an attorney in private practice in Washington, said in an e-mail.
Alan B. Graf Jr., CFO of Memphis-based transport giant FedEx Corp., said in a conference call with analysts Tuesday that FedEx may boost its $5.9 billion fiscal year 2018 capex budget if tax reform is enacted, though such a step-up would require a significant pickup in economic activity. The company also reported on Tuesday very strong fiscal second-quarter earnings, sending the price of its shares soaring nearly $9 a share in yesterday's trading.
Large truckers may not make immediate use of the tax bill's provisions, because they are still looking for drivers to fill the seats of the trucks they have. Large fleets are more concerned with driver recruitment and higher freight rates than they are in leveraging the bill's benefits to make additional equipment purchases, Benjamin J. Hartford, transport analyst for Robert W. Baird & Company Inc., an investment firm, said.
Randy Mullett, who runs his own lobbying firm after years as chief Washington lobbyist for the former trucking and logistics giant Con-way Inc. and then Greenwich, Conn.-based XPO Logistics Inc., which acquired Con-way in 2015, said the bill's expense provisions are a "small-business issue" more suited to independent owner-operators and micro fleets rather than large operators. Mullett said, though, that the language may goose truck and trailer investment as freight demand picks up and rates rise. The tax reductions also may free up capital for more mergers and acquisitions activity, he said.NOT FOR EVERYONE
The tax breaks in the bill are not to everyone's liking. Most agree on the need to reform the complex and outdated tax code to streamline the process for consumers and allow businesses to more effectively compete. Yet many have objected to what they consider $1.5 trillion in budget-busting giveaways to corporations that are already performing quite well and not in need of additional stimulus. Many independent economists also question the Trump administration's forecasts of the law's impact on economic growth, especially by the middle of next decade, when some business and personal tax benefits expire.
The need for more fuel on the economic fire will likely be a matter of debate within the material handling sector. That segment is enjoying a bullish run, as the e-commerce boom ignites demand for more and larger warehouses and distribution centers, and for the systems and equipment needed to support a radical shift to the so-called omnichannel fulfillment model.
For example, the Conveyor Equipment Manufacturers Association (CEMA) said that booked orders for conveyor equipment in October rose 40.3 percent compared to October 2016, while shipments, otherwise known as "billed sales," increased by 29.3 percent over the same period, CEMA said.
"For the past couple of years, we've been on a record pace," said Bob Reinfried, CEMA's executive vice president. That's because warehouses have been investing in systems that allow them to handle high volumes of small e-commerce orders instead of pallet-sized loads, Reinfried said. "The strength of the market now is in unit handling, while the bulk side of the business has been relatively flat for a while," he said.
The expensing changes will "be a huge feature that will stimulate capital improvements in small to medium-sized companies," Mark K. Nelson, president of Nelson Equipment, a conveyor systems and pallet rack supplier in Shreveport, La., said. However, Scott Hennie, president of the Hudson, Ohio-based consulting firm Elite Supply Chain Solutions, and a board member of the Material Handling Equipment Distributors Association (MHEDA), said the overall impact may be limited, because buyers have already been opening their wallets.
"I don't believe that successful businesses wait on Washington to make their purchasing or strategic decisions," said Hennie. "Businesses, generally, are not going to stall or move their business based on what is decided by political bureaucrats."
Given surging demand for material handling equipment and systems, a tax incentive is more likely to sustain the current trend than trigger large jumps in new orders, said Philip Evers, a logistics professor at the University of Maryland's Robert H. Smith School of Business.
"A tax cut could certainly spur investment in some of those new technologies, but industrial buyers won't necessarily buy more expensive equipment than whatever will get the job done," Evers said. "They're more attuned to purchasing what's needed, nothing more."
Ben Ames contributed to this report.