Tax Considerations if You Have a Manufacturing Business
December 13, 2021
December 13, 2021
Manufacturing companies face a variety of challenges on a daily basis. Stressful time demands, supply chain management, regulatory changes, and constant technological advances are some of the issues that manufacturing businesses face all the time.
Long-term strategies are required to balance day-to-day operations and maintain a manufacturing company’s competitive advantage. However, with all these challenges, manufacturing businesses need to consider different tax planning opportunities that will help them make an impact on their business finances.
Today, new tax strategies are emerging for manufacturers that can find growth opportunity where they could not find it before. It is also important to recognize that manufacturers must meet the responsibilities that come with the benefits of the new strategies.
In this article we will talk about some aspects that every manufacturing CFO should take into account when evaluating the current tax environment.
Domestic Production Activities Deduction
This is known as the “Section 199 Deduction” or “Production Deduction” and consists of incentivizing manufacturing income for production, growth and extraction activities derived in whole or in large part from activities in the United States.
A deduction of 9% of income is allowed for qualified production activities. Although the deduction is limited to disposable income and 50% of W-2 wages, manufacturing companies can benefit from the deduction.
It is extremely important for manufacturers to be aware of tax savings opportunities that may arise from prior year operations. Different instances of tax planning can be applied in a manufacturing company, these are the most common.
- Net Operating Loss Carryforward: The CARES Act created the ability for taxpayers to carry back net operating losses (NOLs) so that they can offset taxes paid in the previous five years.
- Cost Segregation Study: For this strategy, a cost segregation study is used to identify all costs for a manufacturing plant with a useful life of fewer than 39 years. If the operating company does not own the facility, a study can be applied to a related-party holding company.
- Accounting and Taxes: This strategy can be applied to current or prior-year tax returns to make an accounting change. Consent of the Internal Revenue Service is required through a form. A change from prior years may require a prior period adjustment based on the accounting exchange rate.
Tax Credits for Manufacturers
Tax credits are commonly derived from operations, employees, and facilities. A thorough understanding of each business aspect of the business is necessary to know if it is eligible for multiple tax credit opportunities.
The most common tax credits are:
- Research and Development (R&D) Tax Credit: This credit is an incentive for operating companies to invest in research and development. Manufacturing companies can take advantage of these credits to increase growth and competitiveness.
- Payroll tax credits and deferrals: The CARES Act provides a refundable payroll tax credit for 50% of wages paid to employees during the COVID-19 crisis. If the manufacturing company suffered from government orders causing business limitations, reduced sales from the previous year, travel, etc. the company can claim the credit.
- Work Opportunity Tax Credit: This credit had been eliminated but was reactivated and is now extended through 2020. This credit is the result of hiring specific disadvantaged employees such as qualified veterans, youthful summer employees, ex-offenders, recipients of supplemental social security income, qualified long-term unemployment recipients, among others.
- Family and Medical Leave Credit: The family and medical leave credit require employees to receive at least two weeks of paid time off and pay at least 50% of regular earnings during the time off. The credit ranges from 12.5% to 25% depending on the level of compensation.
Other Areas to Save Money
A manufacturing company should consider a number of opportunities when it comes to saving money beyond tax strategies. Some additional items to consider in order to minimize taxes and save a little money are:
- Review current contract terms: If you have a minimum interest rate on any variable contract with the bank, it is advisable to refinance. You can ask to extend the length of the renewal, which will help you freeze rates and maintain your relationship with the bank.
- Seek a renegotiation with your suppliers: A good idea is to make early payments, which could get discounts and improve prices.
- Improve inventory management: Properly managing inventories within a manufacturing company can improve cash flow. Try to eliminate excessive inventory or slow moving inventory, this can reduce wastage of merchandise.
- Sell assets: Review each asset annually or more frequently so you can determine if you can sell any non-productive assets.