Is Tax Reform Spurring Companies to Use Robots?

Two provisions of the Tax Cuts and Jobs Act may have more companies deciding to replace real workers with mechanical ones.
David McCannMarch 11, 2019

More companies are finding more uses for robots, a broad trend that certainly will further expand. Many factors explain it — including a perhaps surprising one: the Tax Cuts and Jobs Act.

A key provision of the tax reform law allows companies to deduct 100% of the cost of equipment in the year of its purchase, rather than depreciate the cost over a period of up to seven years.

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The immediate tax benefit may be a deciding factor for a company that could purchase robots to perform work traditionally handled by humans, notes Marvin Kirsner, an attorney with law firm Greenberg Traurig.

The benefit applies to mechanical robots, and not to the software bots that companies are increasingly using to automate back-office and other repetitive processes that workers perform with computers.

But the use of mechanical robots in business is spreading even faster, most particularly in factories, warehouses, distribution centers, and most recently retail stores. Drones are robots. So are self-driving cars, whose first wide-scale application may be delivering groceries and other consumer goods.

Robots are also being deployed for any number of specialized business purposes, like delivering mail on large corporate campuses.

“This is a developing story, and it’s controversial, of course, because of the worker-displacement issue,” says Kirsner. “But it’s a competitive choice, and the tax benefit is certainly going into the equation. I’ve been discussing this lately with a lot of [companies] that are going through the analysis.”

The 100% first-year write-off for equipment is scheduled to remain in effect until the end of 2024, at which point it will begin to phase out.

A potentially even better economic opportunity is available to pass-through entities — such as partnerships, limited liability companies, and subchapter S corporations — because of another TCJA provision.

Pass-through entities don’t pay income tax at the corporate level; rather, corporate income is allocated among partners, LLC owners, or subchapter S shareholders, as the case may be. Under the new Internal Revenue Code Section 199A established by the TCJA, those individuals can deduct up to 20% of such income.

Say a pass-through company has $10 million of annual income. The individual taxpayers will be able to deduct the full $2 million if the company either pays $4 million of W-2 wages or owns $80 million of depreciable assets (or has a combination of both). “In order to get the deduction, you either have to hire people or buy equipment,” Kirsner notes.

Now, let’s say the company decides to undertake its own manufacturing operations and therefore must decide how many workers to hire vs. how much to spend on robotic equipment.

The Section 199A provision “establishes a standard of 20 to 1 for comparing the tax benefit of investing either in robots or new workers,” explains Kirsner. That is, each one-time investment of $20 in robotics would bring the company the same deduction benefit it would get for each $1 of annual wages paid to the new workers.

“When the 100% first-year write-off is taken into consideration, it might cause some pass-through businesses to invest in robots over human workers,” Kirsner says.

It’s likely, he notes, that states will ultimately impose a higher sales tax on the purchase of robots — or establish some other new tax regime — in order to reclaim lost tax revenue from displaced workers. They may then use that revenue to fund programs to train such workers, he adds.