On the whole, the proposed tax reforms are a win for the scrap industry.
Though the recent proposals for tax reform have met with controversy and harsh criticism, corporations and pass-through businesses stand to gain quite a bit from the changes. In addition to direct savings through tax cuts, companies may benefit from export incentives and a measure that allows assets to be filed immediately as an operating expense rather than a capital investment.
These changes are particularly advantageous for the scrap industry for three reasons:
- First, the vast majority of recycling businesses are structured as pass-throughs, just as 9 out of 10 businesses are in the US as a whole.
- Second, processing scrap efficiently requires investments in heavy equipment, not to mention the fact that evolving waste streams necessitate frequent updates to machinery. Being able to immediately expense equipment purchases and upgrades could significantly reduce a pass-through’s tax rate by reclassifying investments as operating expenses.
- Finally, US scrap exports generate an estimated $78 billion in economic activity. The proposed bills would include lower tax rates on income earned from exports, making foreign trade as appealing as ever – even in light of China’s scrap import bans.
Specific measures found in both versions of the tax bills that could affect the recycling industry include:
- Lower Corporate tax rate. The corporate tax rate would fall from 35 percent to 20 percent, with the House pushing for the cut to take effect in 2018 and the Senate in 2019.
- Diminished tax liability for high-earning pass-throughs, such as S corps and limited liability companies (LLCs). The pass-through tax rate would be capped at 25 percent under the House bill, while the Senate version would allow greater deductions (up to 23 percent) of pass-through income.
- Full and immediate expensing. Through 2023, businesses would be able to deduct investments in new equipment from their taxable income.
- Interest charge international sales corporation (IC-DISC provision). This provision would tax export income at a lower rate than regular income.
- Research and Development (R&D) deductions. Though businesses would still benefit from a R&D tax credit, deductions would have to be spread out over a period of 5 years – as opposed to the current law that allows for immediate write-offs.
- Energy tax credits. Renewable energy tax incentives that expired in 2016 would be restored.
Though legislation was approved, reconciliation of differing bills needed before final floor vote.
On November 16th, House reps and the Senate Finance Committee passed their own versions of the Tax Cuts and Jobs Act, with final approval by the Senate of the initial bills won during an all-nighter session on December 2nd. The proposed tax legislation polarized both chambers, as the bills were carried by the Republican majority without a single vote by Democrats. Differences in the Senate and House versions of the bill must be reconciled before the law is ready for President Trump’s approval.
Want to maximize recycling revenues no matter the tax code? Contact our industry veterans at Berg Mill Supply. Berg Mill has over 50 years of experience helping businesses capture the best possible value for their recyclables.