What fabricators can expect from the Build Back Better initiative

There's no doubt that the Build Back Better (BBB) bill is a tentpole initiative of the Biden administration. The proposed plan passed the House with its version of the $1.75 trillion safety net package, expansion of the Child Tax Credit, funds for expanding Medicare and for universal preschool, initiatives for affordable housing, major Obamacare subsidies, and renewable energy credits.

Since its drafting, the bill has faced a controversial uphill battle but has finally entered the Senate and is up for a final makeover. While the bill will be focused on upgrading the nation's social safety net (by lowering the cost of child care and health care), many questions remain regarding how this bill, and the infrastructure bill, will be paid for. Many are speculating on potential tax increases.

Understanding the Build Back Better Bill

The BBB initiative claims to provide large-scale investments to solve grave deficiencies in our society, boost our economy, and position the U.S. to compete in the global arena. Significant investments in manufacturing, clean energy, child care, and health care are critical components of Biden’s campaign promises.

But these big programs, accompanied by the Infrastructure Investment and Jobs Act, which was signed into law last November, come with big price tags. Early proposals called for tax hikes across the board, including increases to the capital gains tax and the corporate tax rate. However, it appears many of those provisions have not made it to either the infrastructure bill or the House’s BBB bill.

Here are some things that have made it into the current BBB bill:

• A 5% surcharge on high-income earners, defined as those who make more than $10 million annually, with an additional 3% for those who earn more than $25 million annually
• 15% minimum tax on corporate book income for corporations with more than $1 billion in profits
• 1% excise tax on the value of stock repurchases
• Reductions in deductions for global intangible low-taxed income (GILTI) to 5% and for foreign-derived intangible income (FDII) to 21.875%

How Will Manufacturers Be Affected?

The focus of the tax hikes is on very high-income earners, so it may seem clear that they won’t affect most Tube & Pipe Journal readers. But one of the changes that will affect the manufacturing sector is a delay in the requirement to amortize R&D expenses over five years, instead of taking immediate deductions.

The R&D Tax Credit is the single largest tax break available to the metal fabrication industry, and no industry claims the credit more. Currently, however, the law is set to change. The Tax Cuts and Jobs Act will force businesses to spread out R&D expense deductions over five years. This, of course, would significantly impact the bottom lines of companies that invest in R&D. The passage of BBB would delay the amortization requirement until after 2025.

Incentives like the R&D Tax Credit have helped manufacturing companies significantly offset their tax liability. The credit gives them a dollar-for-dollar credit against taxes owed or taxes paid, creating a significant reduction of current and future years’ federal and state tax liabilities. To fully benefit from the BBB bill, manufacturers will want to take advantage of the R&D Tax Credit as soon as possible before the amortization requirement kicks back in.

It is also worth considering that the BBB may add funding to the IRS so the agency can increase enforcement. Recently the IRS has introduced new filing requirements for information from businesses claiming the R&D Tax Credit. For a claim to be valid, companies must:

• Identify all the business components to which the credit can be applied that year.
• Identify all research activities they've conducted and provide the names of individuals who led each research activity, as well as the information each individual sought to discover.
• Identify the total qualified employee pay expenditures, total qualified supply expenses, and total qualified contract research expenses for the claim year (using IRS Form 6765, Credit for Increasing Research Activities).

This means there is not only a premium on claiming the R&D Tax Credit now, but also a premium on doing it right. To be clear, however, there is no change on qualifying for the credit, so if you qualified before, you still qualify now. Manufacturers regularly claim six to seven figures in credits and refunds from the credit.