Companies are incorporating the newest technologies into their businesses at a rapid pace. Whether Industry 4.0 or other similar standards, new technologies are exciting and can accelerate rapid growth when successfully implemented.

Examples of the expected growth in manufacturing-related technologies from a recent study include:[3]

  • Artificial Intelligence (AI) investment forecast to approach $200 billion globally by 2025. (source:  https://www.goldmansachs.com/intelligence/pages/ai-investment-forecast-to-approach-200-billion-globally-by-2025.html)
  • The CAGR for the blockchain market is more than 59.9 % for the same period. (source:  https://www.fortunebusinessinsights.com/industry-reports/blockchain-market-100072)
  • Spending on advanced robotics technology is expected to experience a CAGR of almost 20%.

When implementing new technologies, do not neglect dealing with all the potential tax implications. If new technology implementation is not properly planned for, the changes can drain your company's cash flow.

Potential, often unforeseen, tax implications that arise from evolving technology can change how your company does business and how you do business with suppliers and customers.

Technology's ability to break down the barriers of location can have separate tax implications, as well.

Upgrading Equipment

Technology-based capital expenditures can help your company grow and stay competitive in today's fast-changing business environment. Even future investments in technology-based manufacturing solutions can have old-fashioned tax implications.[1]

  • Tax credits can be a factor when choosing where your company makes investments. Several municipalities, states and countries offer tax-incentives to encourage business investment. If the level of the capital expenditure is substantial, it might be a deciding factor for investing in upgrades for an existing facility in a location that does not offer incentives or investing in a new or existing location that does.
  • Technology-based production can change a company's supply chain, which can change transfer pricing models. Depending on the location, taxes can vary at different stages of the manufacturing process.

The Tax Cuts and Jobs Act of 2017 included incentives for companies to purchase, upgrade and invest in new equipment.[4]

Incentives from the Tax Cuts and Jobs Act of 2017 include:

  • The Section 179 deduction limit for 2023 was raised to $1,160,000 and the total equipment purchase limit was raised to $2,890,000.  This is an increase from 2022 Section 179 tax deduction.  The limit for 2024 will increase to $1,220,000 and the total equipment purchase limit will be increased to $3,050,000. [5]
  • Bonus depreciation generally taken after the Section 179 spending cap is reached begins to phase down in 2023…
    • 80% for property placed in service in 2023
    • 60% for property placed in service in 2024
    • 40% for property placed in service in 2025
    • 20% for property placed in service in 2026
    • 0% for property placed in service in 2027 and later years

Regardless, it is a good idea to ensure that your company is using the most beneficial method of depreciation available.

Employment Taxes

Technology upgrades can result in deploying your company's workforce to different parts of the country, or even the world, based on changes to your organization's business process.

Pursuing manufacturing technologies, such as data exchange and resulting automation (also known as Industry 4.0), can change how employees are needed and how they are compensated, which may result in new types of compensation and incentive packages for employees.

Also, employment-related taxes may be due in multiple taxing jurisdictions depending on employee work and travel patterns.

Changing technology may require companies to utilize third-party workers or use temporary/contract workers in some cases. Both could have unique and complex tax implications that must be considered and complied with.

The breakdown of physical work barriers created by new technologies can cause unexpected employment tax liabilities if the technology's business logistics are not mindfully planned for.

Reporting Requirement Changes

Changes in technology can transform companies from providers of goods into providers of services. For example, if a company physically stocks replacement parts for its customers, it would be considered delivery of a physical good. If a company's technology evolves to the point where it is electronically sending design specifications to customers to produce the part via digital printing or a similar process, it might be considered a service.

Tax treatment for these types of transactions can differ. Additionally, if a company utilized warehouses or physical facilities in the U.S. near customer hubs and now performs the work overseas, new taxes could be imposed.

Physical Presence

Physical presence has long been a key factor regarding which country has taxing authority over a business or business unit.

Technology has disrupted this concept.

The basic rules surrounding tax nexus, physical presence and related issues regarding taxation, have been largely unchanged for the past 70 years.[2] Technology's evolving nature and the ability of businesses to generate income almost anywhere with relative ease is changing how countries tax businesses.

The point is not how these countries, and their taxing authorities deal with taxing issues, but how the world of taxation will change drastically due to the continuous evolution of technology and how it's changing where and how business is done.

Do You Need Help Implementing New Technology?

PNC has a long track record of investing in financial decision makers and their business' success. We can work with your internal and external tax experts to help your company ensure that you are investing in technology properly and the plan for the potential new tax liabilities involved.

Ready to Help

Learn more about PNC Equipment Finance's capabilities by visiting pnc.com/ef or by contacting a representative today.