Recent Interest Rate Cuts
After much speculation, the Federal Reserve reduced the interest rate on July 31, 2019. This was the first cut in over a decade. The quarter-point reduction to 2% came as an effort to primarily do three things:
- Increase inflation to the preferred rate of 2% per year as opposed to the current 1.6%.
- Act as a preemptive strike to prevent or lessen the likelihood of an economic downturn due to sub-par global growth.
- To help reduce the concerns and potential impact of the current trade wars between China and the United States.
Despite the wavering opinions from economists on whether the cut was necessary, there has been speculation that interest rates may continue to drop throughout the year.
Impact to Manufacturers
The recent interest rate cut could quite possibly provide a silver lining to manufacturers for what has seemingly been a slow first half of the year for the industry. With the cost of borrowing down, manufacturers can now borrow at reduced rates and seize the opportunity to begin investing in capital assets that can help to revamp how the company operates while incurring less interest expense.
These purchased assets do not only have the potential to help business operations but can also help to save a substantial amount from a tax perspective. Thanks to recent tax law changes, purchases of new or used qualified property can now receive a 100% additional first-year depreciation as opposed to the 50% limitation in prior years. In short, what this means is that a larger amount of income can now be deferred to a later time with the purchase of the qualified property.
Another potential tax impact to consider is how much interest expense a company is incurring. During 2018, some companies saw interest expense was limited due to tax reform. As companies borrow more, it is important to consider what interest limitations can mean to their tax situation.
All manufacturers have the potential to be impacted by these rate cuts. The impact may be difficult or impossible to prepare for fully, but a simple step you can take is to begin researching. If you’d like to discuss your options in more detail, feel free to contact us here or call 513-241-8313. Our industry leaders can connect you with the resources you need. We look forward to speaking with you soon.