Have You Taxed a Ford Lately?
Ernie Neve, CPA
May 16, 2018
On May 2, fire broke out at the Meridian Magnesium Products of America plant in Eaton Rapids, Michigan. The factory supplies components to Audi, BMW, Daimler, Fiat, GM, Tesla, Jaguar and Mercedes. But their most important product may be the die-cut radiator "front bolster" supports in Ford's F-150 pickup. Workers pressure-feed molten magnesium into a mold, then rapidly cool it like Jell-O. And Meridian is the only factory that does it. No bolster, no truck. The fire has forced Ford to shut down production of the truck completely while they scramble to come up with the part.
The F-150 may look like just another pickup truck rumbling down America's fast-crumbling roads. It's not. It's been the best-selling vehicle in the entire country since M.A.S.H was on primetime and the most profitable vehicle of all time. The average truck sells for $47,000 and you can pay north of $70,000 for a fully-loaded Limited SuperCrew model. Celebrity drivers include Walmart founder Sam Walton, actors John Goodman and Dwayne "the Rock" Johnson, Michael Jackson's son Prince, and even singer Lady Gaga.
So, shutting down production is a big big deal. But we're not here to talk about about the downsides of just-in-time manufacturing, cascading supply chain failures, or black swan events. We want to know what the IRS and other tax collectors think about this sort of manufacturing mishap!
Ford has already laid of 7,600 employees. Idled employees will qualify for unemployment insurance benefits, which are taxable because they replace wages that would have been taxable. The United Auto Workers also provides members with taxable supplemental pay after a certain point. So the IRS likely won't see much loss on the employee side.
What about Ford itself? The company recently decided to scrap production of that quaint product we used to call "cars" (other than the iconic Mustang) in favor of trucks and SUVs. Ford has already sold 300,000 F-150s this year, at an average profit of $10,000. One Wall Street analyst recently calculated the "enterprise value" of Ford's truck business at $20 per share. That's a neat trick, considering the whole company's stock is just $11 per share.
Right now, Ford has an 84-day supply of trucks waiting for buyers. But Meridian says it could take 120 days to get their plant back to normal. You don't have to be a math major to see the problem. Losing just one week of F-150 sales could cost the company $175 million in profits. And that, in turn, suggests that with the current corporate rate at 21%, the IRS could miss out on over $35 million in tax.
Or would it really? It turns out that Ford is carrying billions of dollars in net operating losses on their books. They use those losses from previous years to offset their current income. In 2013, they even paid their CEO more than they paid the IRS. (Alan Mulalley took home $23.2 million, and Ford snagged a $19 million refund.) So if the factory fire really does cost Ford millions, the tax hit may not show up in Uncle Sam's pocket for years.
Nobody plans on a freak accident taking out production of a key part. That's why you buy insurance. But there's nothing unexpected or surprising about tax bills. You know the IRS wants a share of your production. So call us when you're ready to plan for that, and be sure to keep a fire extinguisher handy!