by Steve Menaker and Mathew Talcoff
RSM US LLP is an IMA Member
As companies get their first breath of tax reform air and effectively lower corporate tax rates, how are they spending the free cash on their balance sheets? Are they paying debt off, buying back stock, providing employee bonuses, investing in infrastructure? If so, are they addressing equipment improvements, updating facilities, upgrading technologies?
A recent RSM report on capital expenditures (capex) among middle market businesses explored this topic indicating some companies have been cautious with their capital spending, perhaps missing a key opportunity to invest in technology.
Weighing many variables
Following implementation of the 2017 Tax Cuts and Jobs Act (TCJA), some U.S. manufacturing companies have indeed increased domestic spending, yet many also had planned for capex months before tax reform was a reality.
Some two-thirds of middle market manufacturers surveyed last year indicated they planned to increase their investments in technology on everything from 3D printing to business analytics solutions. And at least half of those manufacturers planned to invest in other capex such as equipment and machinery, research and development, process improvement, and training and workforce development, all before tax reform, according to the 2017 RSM Manufacturing Monitor.
In a highly competitive business world, increased efficiencies and workflow, optimized product usage, customized client engagement, secure data management and improved business intelligence are musts for businesses.
“Manufacturers in the industrial products sector don’t base their decisions on one thing like tax reform to trigger whether they should spend on capex business improvements. They look at a number of variables to assess spending decisions, from market data to return on investment projections,” says Steve Menaker, RSM’s national manufacturing practice leader, adding that if companies have an existing capex strategy, then the extra cash from tax reform certainly helps them make the outlay. However, the recent trade spat between the U.S. and China has created some hesitancy and delays, too. For some, Menaker notes, as companies wait for a clearer view of the trade and tariff impact, there is somewhat of a wait and see approach.
This cautious stand might make sense for some businesses, according to RSM’s monthly economic report, The Real Economy. “If a negotiated trade settlement isn’t reached soon, middle market businesses should begin to prepare for a price shock, driven by large businesses passing their rising input costs downstream,” writes RSM US Chief Economist Joe Brusuelas. “As the tariffs on imported goods begin to bite, the middle market will bear a disproportionate burden of adjustment.”
Matt Talcoff, RSM’s national tax lead for the consumer products practice, stresses the careful thought process some businesses have taken surrounding capex outlays, as well as the many variables companies must weigh, including tariffs. Many consumer products and food and beverage manufacturers have also been thinking about their capex spending for months, he says.
Eighty-one percent of middle market food and beverage manufacturers surveyed were taking steps to develop a strategy for digital transformation, clearly looking to make substantial capex investments around technology, according to RSM’s Digital Transformation Study, a report conducted earlier this year. However, while they’ve been thinking about capex investments, Talcoff said some companies are also considering the tax law opportunities, complexities and what the TCJA means for them.
“Many consumer products manufacturers are now just understanding how the tax law impacts them and the business adjustments that could be made to capitalize on opportunities to positively impact overall cash flows,” he says. “A careful tax planning approach can reveal opportunities to free up cash for capex investments, but businesses are still working with their advisors to understand these various tax strategies, in many cases.”
One sector, the privately held craft beer industry, has seen some early benefits from tax reform. “Because many craft breweries are flow-through entities, these businesses have seen up to a 10 percent federal tax rate reduction and have used that planned savings for needed growth efforts,” says Talcoff.
Next steps for capex
It’s not too late for businesses to learn about the impact and advantages of tax reform, especially in relation to how it might impact capex spending plans. To get started, middle market companies should assess business goals and prioritize multiyear capital outlays needed to support their growth strategies. Technology spending is particularly important now, as the economy moves through a period of profound disruption. For some middle market industrial and consumer products manufacturers investing in technology could ensure long-term viability and address an increasingly competitive marketplace. In addition, companies should engage their tax advisor to initiate early tax planning, identify opportunities and reduce the time it takes companies to recover investments.
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