Lower your business’s tax burden with these incentives
The U.S. corporate tax rate is one of the highest among developed nations. According to National Association of Manufacturers President and CEO Jay Timmons, “Comprehensive tax reform for manufacturers of all sizes is essential to unleashing the economic power of manufacturing and making the United States the best place in the world to manufacture. Our outdated and uncompetitive tax system is holding us back from competing with nations that have adopted pro-growth systems.”
The tax-rate imbalance reveals that manufacturing businesses need to take advantage of applicable tax breaks when they are available to maintain profitability and stay competitive. While accelerated depreciation is frequently noted as a tax benefit, a few other incentives are available to manufacturers.
The LIFO Inventory Method
Generally, the last in, first out (LIFO) inventory method will result in a reduction of taxable income in an inflationary situation. Swings in transportation costs, weather-related matters, customs and other factors may have a significant impact on inventory pricing. This provides an opportune time to revisit a change to LIFO when calculating the company’s taxable income. For example, based on the PPI inflation within its product mix, a Virginia-based food production company obtained first-year tax savings of $40,000 by converting its inventory to the LIFO basis.
The use of government indices has significantly simplified the required accounting for a LIFO taxpayer. For example, the U.S. Producer Price Index (PPI) program measures the average inflation and may be used for LIFO analysis. To adopt LIFO, a taxpayer need only make an election and make the required calculations. The U.S. Internal Revenue Service (IRS) does require financial statement conformity, meaning that the company’s financial records are also to be maintained on a LIFO method.
Domestic Production Activities Deduction (Section 199 Deduction)
Manufacturers and certain other businesses may benefit from a specified deduction of up to 9 percent of qualifying production income.
The expense is a deduction when calculating taxable income and, unlike many other tax incentives, is not required to be recaptured in later years. The IRS recently issued additional guidance regarding the benefits and burdens considerations, so it may be an opportune time to readdress this deduction for your business. There are other limitations on the deduction, such as percentages of qualifying wages and taxable income limitations.
Repealing or trimming the Section 199 tax deduction is being closely examined as an option to increase tax revenue. It is estimated that the impact of eliminating the Section 199 deduction would cost taxpayers in excess of $190 billion over the next 10 years.
Research and experimentation tax credits
The research credit is an incentive for businesses to be innovative and conduct research. Lab coats and test tubes are not required, and often the credit is valid for innovative thinking and testing of new processes.
The requirements to qualify for the credit are generally based on U.S.-based labor and materials. Many manufacturers are conducting such qualifying activities and may be eligible for the credit but have not performed the analysis necessary to report the credit. Congress recently extended the research credit through Dec. 31, 2014, and taxpayers may also file amended returns for prior years to take the Federal credit.
Additionally, Virginia offers a refundable state credit for eligible expenditures of up to $35,100 per year. For example, a Virginia-based craft brewer was able to obtain $30,000 in federal and Virginia research credits by analyzing its new product development activities.
The IC-DISC Benefit
Interest Charge-Domestic International Sales Corp. (IC-DISC) is a federal tax benefit for businesses that participate in exporting of their products. Companies that export products outside the United States, including Canada and Mexico, can save more than 50 percent on their federal income taxes related to export sales. The IC-DISC provides U.S. exporters and their shareholders with a tax savings of up to 20 percent of net export income.
For taxable years beginning in 2014, IC-DISCs are also exempt from Virginia income tax.
While manufacturing businesses continue to seek opportunities to be competitive in today’s new economy, taking advantage of available tax breaks is a must. A thorough review of your tax situation by an accounting professional ensures you are planning appropriately.
Gary Wallace provides tax services to public and private entities and their owners in a variety of industry segments, including manufacturing, retail, real estate, and financial services. He is a leader in the firm’s Manufacturing, Distribution, and Retail industry team. Read more of Gary’s insights on our blog.
Committee for a Responsible Federal Budget: The Tax Break-Down: Section199, The Domestic Production Activities Deduction
Congressional Research Service