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Tax Reform Logic

10/18/17       
cabmaker

One of the tax reform proposals in congress today reduces the time frame that machinery investments are amortized over.

The argument is that "The extra capital should, in turn, make workers more productive, raise their wages and increase tax revenues".

Can somebody explain the logic of this to me? If I was going to make a big investment in my company today would it be one that lowered the cost of labor or one one that raised the wages for labor?

I can understand how this kind of declaration might appeal to the hoopleheads but I am not sure what the cause & effect relationship is.

The most expensive machine in a cabinet shop today is a CNC machine. Aren't those machines marketed with the claim that they will help lower wages?

10/19/17       #2: Tax Reform Logic ...
Pat Gilbert

Not that you will hear me,

The difference between the advanced countries and the not so advanced countries is capital investment.

The difference between advanced cabinets shops and the not so advanced cabinet shops is capital investment.

Encouraging capital investment creates jobs. Encouraging capital investment grows the economy.

I thought this has been going on for some time, wouldn't this just be a continuation of what is already happening?

Labor gets paid according to how productive it is. E.G. a guy running a backhoe makes more than a guy running a shovel. More capital investment = higher wages.

10/19/17       #3: Tax Reform Logic ...
cabmaker

Are you saying increased investment in robotics will increase wages?

Did cabinet shop wages go up as a function of investment in CNC?

10/19/17       #5: Tax Reform Logic ...
Pat Gilbert

You bet.

Anecdotally when I bought my first cnc it certainly created more jobs that paid better.

Not to mention cnc repairmen, cad work, specialized cutting tools, new products and services (for us to build), AND someone who knew how to run a cnc.

BTW this is how the entire economy works (has been going on since the day someone invented the wheel). Robots CREATE jobs they do NOT take them away.

Yeah if you want to continue to make buggy whips that job will shrink. But the quantity of jobs in aggregate will increase, just not the same ones.

10/19/17       #6: Tax Reform Logic ...
Leo G

If you buy a $100K machine, the old way you'd be able to take off $20K a year for 5 years. That limits you because you spent the $100K in one purchase but have to take it off your taxes in lifts.

Now you can make the big purchase and take the whole tax write off at once. That gives you capital right now, not a little bit over the next 5 years.

I'm sure some will argue against it as it can be used to lower taxes over years instead of a one time thing.

I don't know if there is an option to do it either way, or if you'll have to do it as a one time write off.

10/19/17       #7: Tax Reform Logic ...
Jerry Cunningham

Advancements in technology have caused a dichotomy in our economy. We used to have an economy that was vibrant because every citizen at every skill level had an opportunity to participate and earn wages.

Now we have an economy where you can only earn a decent living if you know how to program computers or write code. Those wages are rising, while wages for people who work with their hands have not.

But the catch 22 is that over here in America people at the lower end of the wage scale just don't want to work. I'm sure every shop on here would hire an extra person or two at $10/hour if they were decent people who tried to do a good job.

Robots are down to only $30-40k right now. Very tempting!

10/19/17       #8: Tax Reform Logic ...
Alan F. Member

Basically they are making the rule 179 that has been around since 1981 in various forms permanent instead of waiting until December like they have the last bunch of years

Business Use of Section 179

10/19/17       #9: Tax Reform Logic ...
Pat Gilbert

FWIW

The dearth of construction jobs the last 10 years is because of demographics.

A big factor on the dearth of creating new jobs is minimum wage laws. Also a big factor on automating jobs.

It true that companies off shored many jobs to increase profits, but that is not a current factor. As unemployment is Very low.

10/20/17       #10: Tax Reform Logic ...
Kekaha man

Very few of the posters on this forum would not have been able to take full advantage of Section 179 (depreciating the total cost of equipment in the year of purchase) for the last several years - half a million dollars a year.

Back to the original question.

Sometimes, some companies will replace 2 people with one machine and continue on doing what they always did with no other changes other than increased profitability. More often, you replace 2 people with one machine and increase output, quality and/or diversity of products. Sometimes the only "global" (meaning not internal) difference is transfer of market share, but more often it's not the size of the pieces of the pie that changes, but the size of the pie. More pie = more happy people.

10/20/17       #11: Tax Reform Logic ...
Alan F. Member

Kekaha man,

Its relative to how much true profit you make.

Ideal situation is positive cash flow, cash in bank and low tax liability.

Rule 179 allows you to finance a machine, hold cash, depreciate the asset, reduce taxes.

You can give a vendor 100k, improve your production, reduce your taxes, and defer the payments for 3-5 years to where it may cost .45 to .65 on the dollar after tax savings to buy a machine using rule 179.

If you finance you are theoretically using dollars that have lower future value to make payments.

We have used rule 179 the last 8 years. We are replacing equipment we bought in 2010 this year.

We are significantly more efficient now than we were 4 years ago.

10/20/17       #12: Tax Reform Logic ...
Kekaha man

Alan, I agree with everything you said.

Maybe my point was not clear. Section 179 has been around for a very long time, and for the last almost 10 years the limit has been $500,000. I doubt anyone on this forum felt limited by that amount (unless they were a well-financed startup).

10/20/17       #13: Tax Reform Logic ...
Pat Gilbert

Your point is still not clear to me

10/20/17       #14: Tax Reform Logic ...
Alan F. Member

We had bank approval for more one year but could not make our mind up on two pieces. We ended up spreading it out over 3 years but that was a function of decision making ability. Those years we bought a bunch of smaller items that needed upgrading.

We generally have a budget by April and finance approval before we go to a show.

If you don't have equipment needs put it in a 401k.

There needs to be a strategy to reduce tax liability that also makes business sense.

Maybe if the tax code was less onerous and simpler good business decisions would be good tax decisions.

10/20/17       #15: Tax Reform Logic ...
Kekaha man

If I understood the original post, it was that NEW!!!! tax incentives were NOW!!!! available for depreciation of capital equipment.

My point is that this is nothing new.

But maybe I'm wrong, and most of the posters here would spend 1, 5, 10 million a year if only they could deduct it all the first year.

10/20/17       #16: Tax Reform Logic ...
Pat Gilbert

FWIW Tim's response was not clear.

BTW who is going to buy more equipment eligible on the 187 than they pay in taxes?

No it is not new. And YES lower taxes is always a good thing.

10/20/17       #17: Tax Reform Logic ...
Alan F. Member

Rule 179 allows you to carry forward bonus depreciation if you have $0 taxable income so if you had 150k in profit and bought a new machine for 200k you could carry forward the excess 50k until the next year

intersting link


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