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Manufacturing Alliance to Focus on Workforce and Taxes this Legislative Session

The New York State Manufacturing Alliance, of which the Council of Industry is a founding partner, is focusing on two issues of vital importance to manufacturing businesses across the Hudson Valley and the State – Workforce Development and Taxes.

On the Workforce development front, we are advocating for continued support of the P-TECH program, Career and Technical Education programs, and community colleges. Of particular importance to the Alliance is the expansion of the hugely successful Manufacturers Intermediary Apprenticeship Program (MIAP).

Manufacturers Intermediary Apprenticeship Program

In 2016, New York State provided funding for MIAP program in Central New York.  This program was met with great interest by both manufacturers and their employees.  Since 2016, this program has grown from Central New York where there are over 30 companies formally participating in Registered Apprenticeship and 115 apprentices in seven unique occupations plus another 50 anticipated in 2019.

In 2017, the program rolled out to the Hudson Valley (Council of Industry) and the Rochester Region (through Rochester Tooling & Machine Association).  In these 2 regions there are now more than, 75 apprentices at 30 companies, in 10 different trades.

Manufacturers in the Western Southern Tier are now also beginning to participate in the program, and in the Albany region manufacturers are working with the Center for Economic Growth (CEG).  This momentum has motivated the New York City and Long Island areas to also request help in establishing themselves as intermediaries, proving the model is not only effective but expanding, therefore positively impacting the sector and our state’s business and workforce development as a whole.   In fact, we recently enrolled the first company on Long Island, Estee Lauder.

This model with its use of trusted associations as “intermediaries” and its collaborative partnering is a unique model of apprenticeship and is working for small and mid-sized manufacturers.  In traditional training programs, students are trained and seek employment when they are done – in an apprenticeship, a job comes first and training is supplied by an employer.  Industry participants see an increase in productivity, reduced turnover, and increased employee retention. Ultimately, we see it as a technique for improved recruitment and candidate selection. As employers struggle to fill open positions, apprenticeships are an important tool in addressing workforce development needs. MIAP helps manufacturers build effective apprentice programs.

 Given the tremendous success to date, we feel MIAP is a critical tool for continuing to build a skilled workforce throughout New York State.  This program is an essential component of a workforce development strategy to grow a stronger New York State economy through advanced manufacturing.

We are seeking $1.25 million to expand the program across the state.

A 0% Income Tax Rate for All New York Manufactures

The Manufacturers Alliance has also put forward and is seeking support for a 0% income tax rate for all manufacturers to be included in the 2019-2020 State Budget.

In 2014, we were successful in getting included in the final State Budget a reduction in the tax rate for manufacturers incorporated as C-corps.  This single action propelled New York from the bottom ten to the top 10 states for manufacturing and sent a message to large manufacturers, that New York was the place to invest.  It was a proven and effective tool to retain and grow manufacturing jobs across New York State.

However, the vast majority of manufacturers in the Hudson Valley and across New York State are small to medium-sized manufacturers organized as S corps, proprietorships, LLCs and partnerships (pass-through entities).  These small to medium size manufacturers do not currently benefit from the existing zero percent rate and actually pay the 2nd highest income tax rate in the United States.   They are constantly being enticed by other states with friendlier tax climates to move operations and invest there.  These manufacturers are looking to their home state, New York, to demonstrate that they should stay in New York and continue to grow and invest here.

In response to the pleas from our small to medium-size manufacturers, the Manufacturing Research Institute of New York State, commissioned a study to analyze the impact of extending the zero percent corporate franchise tax rate to these small and medium manufacturers.  According to a study by the Beacon Institute in September 2018, “the elimination of the PIT for pass-through manufacturers would increase private sector jobs by 4,660 in the first full-year and by 5,850 in 2023.   It would cause investment to rise by $118 million in 2019 and by $147 million in 2023. The increase in employment and investment would boost real disposable income by $345 million in 2019 and $503 million in 2022”.

Extending a 0% tax rate to small and medium-sized manufacturers would send a strong signal to manufacturers that New York State is not only open for business but making a solid investment in their economic future.

We are working hard, meeting with legislators and administration officials, to get this change included in the 2019-20 State Budget.

 

 

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A Quick Overview of the New Section 199A – 20% Deduction

By Steven E. Howell, CPA, DABFA – Client Service Partner, and Davide DiGenova, CPA – Tax Partner
RBT CPAs, LLP, a Council of Industry Associate Member

“A provision of the TCJA might benefit Council of Industry member firms organized as pass through entities.  This provision “199A,” provides for a deduction of as much as 20% for business activates conducted by these firms.”

On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law by the President of the United States.  Many of these tax law changes will apply to individual and business taxpayers commencing with their 2018 federal income tax filings.  One of the key provisions of the TCJA provides the ability for taxpayers to receive a deduction for Qualified Business Income, which for simplicity purposes can be referred to as “net income”, generated by a trade or business that is conducted within a partnership, S corporation, or sole proprietorship. One might refer to this deduction as the 20% deduction or, more technically, the 199A deduction.

The amount of the 20% deduction allowed will be based on the taxpayer’s individual taxable income less income which has a preferred federal tax rate such as preferred dividends.  This amount will be referred to as “adjusted taxable income”.  The 20% deduction allowed in a given year will be limited to the lesser of 20% of the adjusted taxable income or 20% of the qualified business income that flows through to the taxpayer.

Determining whether a taxpayer will qualify for the 20% deduction and to what extent this deduction will be allowed is more complicated than its name may suggest.  In order to understand this 20% deduction, one must first understand what types of businesses and income thresholds will disqualify a taxpayer from taking this deduction.  The first threshold that must be reviewed is whether the trade or business being conducted is considered a specified service trade or business (SSTB) or if such trade or business is a business of providing services as an employee (generally, referred to as changing from an employee to an independent contractor in order to benefit from this deduction when the taxpayer is truly an employee).  A SSTB is any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial or brokerage services, investing and investment management, trading, dealing in securities, and where the principal asset is the reputation or skill of one or more employees or owners (generally referred to as an endorsement).  The second threshold that must be met is that the trade or business being operated is conducted within a partnership, S corporation, or sole proprietorship.  This deduction will not apply to trades or business conducted within a C corporation.  The third threshold is whether taxable income exceeds $157,500 for a single income tax filer ($315,000 married filing joint).

Once the three basic thresholds have been analyzed, one can begin to determine the amount of the 20% deduction that will be allowed.  If a taxpayer conducts a trade or business which generates net income and a taxpayer’s taxable income does not exceed $157,500 ($315,000 married filing joint), regardless as to whether such trade or business is a SSTB, the taxpayer will be allowed a 20% deduction for that specific trade or business.

If a taxpayer’s taxable income exceeds the $157,500 ($315,000 married filing joint) but doesn’t exceed $207,500 ($415,000 married filing joint), then there needs to be an analysis done as to the type of trade or business that the taxpayer is operating.  A taxpayer who operates a SSTB and exceeds the lower threshold but not the higher threshold, will begin to lose the 20% deduction based on an income limitation and a wage limitation phase-in.  If the taxpayer doesn’t operate a SSTB, the 20% deduction will be reduced by a wage limitation phase-in only.

When a taxpayer’s taxable income exceeds the $207,500 ($415,000 married filing joint), the taxpayer will be disqualified from taking a 20% deduction on the net income generated by a specific trade or business that is considered a SSTB.  However, if a taxpayer doesn’t operate a SSTB, the 20% deduction will equal the lesser of 20% of the net income generated by the trade or business or the greater of 50% of wages paid by the trade or business or 25% of wages paid plus 2.5% of the unadjusted basis of assets held by the trade or business (excluding land).

As was mentioned earlier, the 20% deduction is a complex area of the TCJA.  It would be worthwhile to consult with your tax advisor as to whether you will qualify for this deduction.  The Internal Revenue Service issued proposed regulations during mid-August of 2018 which has provided additional guidance and has answered many questions for tax practitioners, but there are still areas which need additional clarification.

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Skills Gap/Business Climate Dominated Discussions at Manufacturing Days

The fact that manufacturing is vital to the growth of the economy in New York, and to the corollary of improving the state government’s financial situation, seems to have sunk in to the legislators and administration officials who attended and participated in the Manufacturing Alliance of New York States annual Manufacturing Days March 5 and 6 in Albany. What should, and more importantly can, be done to help became the topic of discussion during the event.

Taxes (corporate franchise, energy, highway use) regulations (DOT,DEC, DOL) and other costs of doing business (energy workers’ compensation) remain the greatest impediment to the growth of the manufacturing sector in New York. Legislators participating on our panel discussion felt that the tide was turning on these issues. All believe Governor Cuomo is setting the right tone and moving the bureaucracy in the right direction on these issues.

Rising near the top of issues of concern to NYS manufacturers this year was the Skills gap. An aging workforce, fewer and fewer students pursuing careers in the sector, a secondary educational system tilted toward preparing students for college, and population under the misconception that manufacturing is fading in this country have all led to a dramatic shortage of skilled workers.Throughout the event in Albany manufacturing CEOs one after the other told of orders and growth foregone over the lack of workers to produce the goods.

Lawmakers are especially sympathetic to this issue.

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