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From Washington to your warehouse

Here's how the federal government's actions on trade and tax law will affect forklift makers and their customers. There will be winners and losers.

From Washington to your warehouse

If you've been keeping up with goings-on in Washington, then you're aware of policy changes implemented earlier this year that are affecting U.S. businesses. What you might not know is that two in particular—changes in tax law under the Tax Cuts and Jobs Act of 2017, and the imposition of tariffs on a wide range of products—could have a direct impact on companies that buy, sell, or manufacture forklift trucks and parts in the United States.

Here's a look at what the federal government's actions on taxes and trade could mean for forklift buyers and suppliers. This article is intended to provide general information; be sure to consult your tax and customs-compliance advisers for guidance on how these changes will affect your company.


FINDING TREASURE IN TAXES

By all accounts, 2018 is a good year to invest in capital equipment, including forklifts. The Tax Cuts and Jobs Act of 2017, passed by Congress in late December, included provisions that make it advantageous to buy equipment now.

One such provision allows many companies to write off capital equipment more quickly than in the past. Specifically, revisions to Section 179 of U.S. tax law allow qualified businesses to deduct more of the cost of new and used equipment, up to a specified limit, and fully deduct it in the same year the property is placed in service, rather than having to depreciate it over a number of years, explains Susan Rice, program manager for Raymond Leasing, a division of forklift maker The Raymond Corp. "Section 179 targets small to medium profitable corporations—you have to be profitable to get the benefit," she notes.

The new law also doubled the maximum deduction allowed under Section 179 to $1 million from $500,000 per year. In addition, it increased the phase-out threshold (the point after which the tax deduction is gradually reduced, or "phased out") for equipment that is eligible for Section 179 to $2.5 million from $2 million. (For more information, see forklift dealer Brodie ToyotaLift's article about Section 179 deductions. The post includes links to a tax-savings calculator published by Section179.org, an organization that promotes the provision's benefits for businesses.)

There's good news for businesses that spend more than $2.5 million per year on capital equipment too. All companies can apply "bonus depreciation" to amounts over the $2.5 million limit, according to Rice. Previously, bonus depreciation allowed buyers to write off 50 percent of the value of new equipment in its first year of service. That has doubled, to 100 percent for qualified equipment acquired and placed in service before Jan. 1, 2023. Bonus depreciation can also now be applied to used equipment. But some restrictions apply, as the saying goes. Most importantly, you must be the first owner of the used piece of equipment, Rice points out. For example, if you use a forklift under an operating lease (i.e., transfer of ownership is not included in the lease) and you buy the residual lease from the leasing company, you become the first owner of what is now used equipment and can write off 100 percent of that residual value in the first year of ownership.

In addition, changes to the U.S. generally accepted accounting principles (GAAP) may affect those who lease forklifts. As Rice explains it, capital leases—which depreciate over time, are counted as debt, and typically transfer ownership at the end of the term—are treated as an asset on the company balance sheet. By contrast, operating leases, which do not involve transfer of ownership, are currently treated as operating expenses on the income statement. But effective Jan. 1, 2019, that will change, as both operating and capital leases lasting more than 12 months will be treated as assets on balance sheets.

These changes in depreciation and accounting rules may cause some companies to revisit the lease vs. buy decision, Rice says, but there are still situations where leasing may be preferable. Much depends on individual circumstances, she says, adding, "We tell customers that every company should consult their tax adviser to understand what opportunities these changes may provide to their organizations."

TANGLING OVER TARIFFS

Both 2016 and 2017 set consecutive records for U.S. forklift sales. So far, 2018 appears to be on the same course. Sales are running higher than at this time last year, according to Brian Feehan, president of the Industrial Truck Association (ITA). "All the economic forecasts we've seen for 2019 are looking good as well," he says. "We're hoping there are no major disruptions."

The potential disruptions Feehan refers to could come from tariffs imposed earlier this year by the Trump administration and from possible changes to the North American Free Trade Agreement (NAFTA). A 25-percent tariff on steel from numerous countries, including the United States' biggest trading partners, that took effect June 1 has raised production costs for U.S.-made lift trucks and parts that include imported steel. Some observers expect prices for U.S.-made steel will also rise as tariffs on imports take some of the pricing pressure off U.S. steel producers.

That's just one of the ways tariffs could affect forklift buyers and suppliers. A second round of tariffs, which took effect early last month, will raise the costs of some forklifts imported from China. Previously, Chinese-made powered industrial trucks, like all foreign-manufactured forklifts, entered the U.S. duty-free. But the 25-percent tariffs on $34 billion of Chinese-manufactured goods that took effect July 6 apply to several categories of electric and nonelectric rider-type forklifts as well as some parts and components. According to U.S. Department of Commerce figures quoted by ITA, industrial trucks and parts worth approximately $538 million were imported from China in 2017; the 25-percent tariff would add an estimated $134 million to the cost of those items. Examples of Chinese-made forklifts sold in the United States include the Baoli, Liu Gong, Hangcha, Heli, Noblelift, and BYD brands. A few U.S.-based companies sell trucks manufactured in China under their own brands and/or include Chinese-made parts in forklifts they assemble here.

Currently, China imposes a 9-percent duty on U.S.-made industrial trucks. If it should decide to add a retaliatory 25-percent tariff on top of that, that would add $13 million in costs to the $53 million of U.S.-made equipment sold in that country in 2017, according to the Commerce Department and ITA. The organization's position is that all tariffs on lift trucks should be eliminated, Feehan says.

While the battle over tariffs has heated up, NAFTA negotiations are on hiatus. The biggest worry for lift truck makers is that the U.S. could make good on President Trump's threat to do away with the trade pact if he does not get the concessions he wants. The United States has also threatened to temporarily suspend the treaty until negotiations have concluded to its satisfaction.

U.S. lift truck makers agree that NAFTA needs modernization to reflect today's business climate, expand U.S. manufacturing, and make American products more competitive. But, Feehan cautions, "let's not lose sight of the fact that it's been very valuable to all three parties. From the forklift industry's perspective, NAFTA has been extremely effective."

The numbers make that crystal clear. The U.S. exports more than $900 million of powered industrial trucks annually to Canada and Mexico, with a combined trade surplus with those countries exceeding $460 million in 2016. Should NAFTA be eliminated or temporarily suspended, U.S.-made forklifts that are now exported duty-free to Canada and Mexico could be subject to duties. That could lead Canadian and Mexican buyers to buy more lift trucks from other countries, Feehan says, jeopardizing U.S. jobs and a thriving U.S. manufacturing industry.

RAYS OF HOPE

What does all this mean for forklift buyers? For some, higher prices may be on the horizon. With so many countries subject to the steel tariff, manufacturers' production costs will rise. If they purchase more expensive U.S.-made steel instead, production costs will still go up. Either way, those added costs could be passed on to customers. (U.S. manufacturers may apply to the Department of Commerce for exemption from the tariffs, but companies that have done so have reported a burdensome application process and glacially slow response from the government, if they received one at all.)

The impact of tariffs on Chinese forklifts and parts is less certain. To mitigate those added costs, manufacturers could shift some production from China to the U.S., or they could import equipment from factories located outside of China. But manufacturing can't turn on a dime, which means forklift makers that already have global production networks in place are best positioned to weather the tariff storm.

One of those is Kion North America, part of Kion Group, the world's second-largest provider of lift trucks. Kion Group, which owns the Linde, Baoli, Still, and Dematic brands, has manufacturing plants worldwide, including in the U.S. and China. "As a member of a global supply chain, Kion North America is certainly being affected by the recently imposed tariffs," said Vincent Halma, president and chief executive officer, in an e-mail to DC Velocity. "Changes within supply chains, including tariffs, are a regular occurrence and simply part of being a global company. However, because we are a global company, that also enables us to find a solution to ensure this is just a bump in the road. To minimize the effects on our distribution network and customers, the solution will be multifaceted, including, but not limited to, in-depth cost analysis on existing products and leveraging other areas of our global supply chain." The company will continue to monitor the situation closely and make adjustments as necessary, he said.

There's one ray of hope. It's possible that the considerable tax benefits afforded by the Tax Cuts and Jobs Act of 2017 could cancel out, or at least substantially mitigate, higher industrial truck prices. But that—like so much involving government policy these days—remains to be seen.

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