New Rules for Immediate Expensing Make it Easier to Invest in Machinery and Software
By Trey Barrineau with contributions by Ellen Rogers
The tax-reform bill that was signed into law at the end of 2017 has many attractive provisions for companies in the glass industry.
For the big players, the corporate tax rate is slashed from 35 per-cent to 21 percent. Smaller companies set up as so-called “pass-through” businesses get to deduct 20 percent of the first $315,000 of earnings. (“Pass-throughs” represent about 95 percent of the 26 million businesses in the U.S.)
But one provision of the Tax Cuts and Jobs Act could have a major long-term effect on every manufacturing business in the industry, regardless of size.
The law allows companies to write off the full cost of new equipment for the next five years immediately upon purchase. Before, the system only allowed these expenses to be written off over an extended period of time through depreciation and amortization deductions.
Additionally, the popular Section 179 deduction for capital expenses will rise from $500,000 to $1 million, with a limit of $2.5 million. (Section 179 of the IRS Code was designed to allow small businesses to take a depreciation deduction for certain as-sets in year one, rather than stretching them over a longer period of time.)
Together, these changes could mean a lot more business in 2018 and beyond for companies that sell machinery and equipment to the glass industry manufacturers. Overall, U.S. orders for manufacturing equipment are expected to rise 12 percent in 2018, according to the Association for Manufacturing Technology.
“Yes, there have been discussions and increased interest not just due to this part of the tax code but also the lowering of the corporate rate has made investing more attractive as well,” says Morgan Donohue, the vice president of sales and marketing with Erdman Automation. “When an owner feels the investment in his or her business will have a quicker payback due to reduced taxes, it simplifies the decision.”
It could also give a big boost to automation efforts as the industry continues to struggle with a lack of qualified workers.
“I’m not a betting man, but if I were, I would bet that the combination of tax changes, a blooming economy and a tight labor pool will all contribute to increased automation on the factory floor,” says Ron Crowl, president and CEO of FeneTech, a provider of software and automation solutions to the fenestration industry.
There’s evidence that companies in the industry are beginning to invest in new machinery, too. For example, in January, PPG Industries Inc. told the Wall Street Journal that it plans to spend $50 million on capital projects in the U.S. this year because of the new expensing rules.
Chip Rogers is the president of WoonTech, a glass fabricator in Whitinsville, Mass., that has made a number of equipment investments in recent years. He also sees opportunities from the new bill for the industry.
“The 2017 Tax Reform Act encourages all companies, inclusive of the glass industry, to reinvest earnings into their companies,” he says.
Rogers points out that the major changes, such as the lower tax rates for corporations and pass-through entities, allow glass companies to redirect a portion of their earnings that used to pay taxes to other areas, such as employee wages, expansion and capital expenditures.
“Another part of the Act brings back 100 percent Federal Bonus Depreciation on both new and used capital expenditures,” he says. “The amount spent is unlimited. As a quick example, corporations spending $1 million on capital expenditures will save hundreds of thousands of dollars in federal taxes.”
Some machinery companies that serve the glass industry are reporting strong sales—and have been for a while.
Mike Rosato, senior machines engineer for Salem Glass and Mirror in Winston-Salem, N.C., says customers have been very encouraged by the new tax reform.
“Principal owners and managers are looking forward to investing in new equipment for the tax savings and are feeling encouraged to be able to expand to meet market, quality and competitive trends,” he says. “Tax savings for business leads to expansion and investment in new equipment and for 2018 and beyond, the deduction limit doubles and increases to $1 million. Furthermore, the maximum limit on deductible equipment purchases increases to $2.5 million. This will help nudge investment toward not just individual pieces of equipment, but more expensive integrated fabrication systems that are robotic, fully combined and communicating with accounting, order and optimization software systems.”
Others haven’t yet had the same experience.
“Although we’ve been quite busy quoting and selling over the last few months I haven’t had anyone directly tell me that they’re purchasing, or interested in purchasing due to some new tax break,” says Todd Tolson, director of sales with ProLine Automation Systems. “That said, I’m sure some of the increased activity we’re seeing is due, in part, to the changes in the tax code.”
Whether you’re looking to invest in new equipment and software now or in the future, USGlass magazine has gathered some crucial information that could help guide your decision.
Sure, all that high-tech robotic and automated equipment is nice, but a purchase like that is beyond your company’s budget, right? That sentiment may have been true for many small- to mid-size glass industry companies, but the recently passed tax-reform bill could change that. Given the opportunities now available, the new bill could spur many companies to invest in auto-mated equipment and machinery.
Automation based on the Industrial Internet of Things (IIoT) is making strong strides in the glass industry, as well as many other manufacturing segments. In fact, a 2017 study by the Boston Consulting Group predicts that by 2020, $267 billion will be spent on IIoT technologies, products and services, which some also call the fourth Industrial Revolution or Industry 4.0.
Aurora, Ohio-based company FeneTech says the requirement for connectivity between software that runs the business and machinery on the floor continues to grow.
“The uptick in the economy has led to the purchase of new machinery by many of our clients,” says FeneTech president and CEO Ron Crowl. “Having realized the benefits of connected systems, many clients get us involved early in their purchasing activities to verify that the machinery has the capability of ‘talking’ to our software.”
What Are the Benefits?
According to the Boston Consulting Group, automation provides many benefits:
• Predictive maintenance. IIoT technologies detect when a machine re-quires maintenance. That can reduce or eliminate unplanned downtime and extend the time between costly repairs, extending maintenance cycles and reducing costs.
• Optimized production. IIoT can monitor and optimize production processes in real time, making adjustments to improve quality and reduce waste.
• Inventory management. Thanks to advances in sensors, global positioning systems (GPS) and cameras, IIoT technologies can track the location and condition of raw materials or products, including temperature and humidity. That allows companies to increase their response time, reduce inventory and boost just-in-time production.
What Are the Drawbacks?
While many in the fenestration industry are rushing to automate, there are still a few stumbling blocks.
Security remains a concern. More devices connected to the internet can lead to the kind of hacking attacks that the public fears with home-automation products. Some companies are developing VPNs (virtual private networks) that can block cybercriminals from accessing the huge amounts of data that manufacturing business generate.
Additionally, there are currently no standards that provide “plug and play” operation for IIOT-connective devices. (“Plug and play” refers to software or devices that work perfectly right off the shelf without modifications.)
“Each machinery manufacturer has different interface protocols—and oftentimes different methods altogether based on the type and vintage of machinery,” says Crowl.To that end, FeneTech is promoting the concept of FENml (FENestration Manufacturing Language) as an industry-wide manufacturer-independent standard with the goal of “plug and play” operation.
FeneTech introduced FENml in the fall of 2017. Crowl says he tried to use GlassBuild America to educate machinery manufacturers about the concept of a unified communication method between dissimilar machines and software applications.
However, he says the industry’s response to FENml hasn’t quite lived up to his expectations.
“I would describe the reception to the idea as lukewarm at best as the machinery people see this as added cost with no real demand at the moment from their customers, the fabricators,” Crowl says. “Having said that, we are currently working with two forward-thinking machinery manufacturers who see value in this. Jointly we are currently attempting to find fabricators to be beta test sites to implement this technology.”
Working Toward Automation
Bell County Glass Co. Inc. in Killeen, Texas, recently purchased new equipment, a new RhinoFAB 900, with plans to purchase a CNC machine for door hardware. Ken VanHoozer, president, told USGlass magazine that while the Texas market has been growing for the last several years, the tax incentives and tax breaks were also a driving force, freeing up money for businesses.
“I think it’s only common sense that any time you can create tax breaks for businesses, especially small businesses, you’re going to see a positive impact on communities and the country as a whole as long as it’s done correctly and doesn’t create more hard-ships down the line,” says VanHoozer.“I think any business that’s been around understands the need to keep up with the trends and technology, because if they didn’t then they probably wouldn’t still be around,” says VanHoozer. “This is our first dabble into automation of any sort, but we look to build from this step moving forward—I think we have to in order to stay competitive and continue to offer the quality of service we do in the timeframes required by the No. 1 burden on this industry, so any automation where you can is key.”
What’s Next: Tips for Making Your Next Machinery Purchase
If you’ve been thinking about purchasing new equipment—or even if you haven’t—now may be a good time to buy, thanks to the tax-re-form bill that was signed into law at the end of 2017. In fact, according to a Key Media & Research survey, 67 percent of industry businesses said they’d been considering buying equipment, and the new legislation confirms their decision to purchase. Likewise, 33 percent said while prior to the bill they hadn’t thought about buying new equipment, they’re now considering it.
“If you can find favorable financing or you have cash [available] and you choose bonus depreciation, 100 percent of the cost of the equipment is deductible on your federal return (only in year one),” says Chip Rogers, president of WoonTech Glass. “There’s nothing [after] year two, so your taxes will go up because you don’t have the depreciation expense as a deduction.”
He adds that companies can also expect big saving. “If your corporate rate is the new 21 percent and you spend $1 million, you save $210,000 in taxes (year-one only).”
However, Rogers points out that be-cause of these changes and the many others resulting from the 2017 Tax Reform Act, more money is being retained by corporations.
“Each corporation will have to decide what they will do with these savings. Faster depreciation is great, but you still need the money/credit in the first place to buy the equipment, and any tax reductions are good only if you make a profit and are paying taxes in the first place.”
And as exciting as it may be to hear the sounds of a new machine humming throughout the facility—and even nicer to do so at a cost savings—buying a new piece of major equipment is still a considerable in-vestment and something that can’t be taken lightly.
There’s a lot to think about and plan for to ensure a successful purchase. USGlass columnist and industry consultant Paul Bieber is well-versed in what it takes to ensure a successful machinery purchase. Here he shares a few points that can guide you in navigating yours.
• Don’t purchase the first machine of a new generation—even when the manufacturer offers a discount.
• Understand the operating costs of the machine—how much power does it use monthly?
• Ask if the manufacturer has a spare parts depot in the U.S. and if it is reachable 24/7.
• Know what spare parts are included with your order.
• Make sure the installation costs are clearly spelled out and how long will the manufacturer’s training team be with you.
• Don’t buy more machinery than you need, with planning three years ahead.
• Understand how many people will be needed to operate the machine, in both slow times and busy times.
• Buy a machine that will cover 95 per-cent of your needs—that last 5 per-cent costs more than it’s worth.
• Does your machine have remote diagnostics so the manufacturer can help you 24/7—in your time zone?
• See it for yourself. Visit an installation of this machine if it is your first time buying this type of equipment.
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