Highlights from the August 17, 2022, webinar hosted by James Dascenzo, CPA, Principal, and National Director of HBK Manufacturing Solutions, and Nicholas Demetrious, CPA, MBA, Principal, HBK Tax Advisory Group

The events of recent years relative to the pandemic have heightened the need to increase chip production in the U.S. U.S. share is currently 12 percent, down from 37 percent in 1990. China wants to control space by 2030. Most advanced chips are made in Taiwan. The CHIPS + Science Act, signed into law on August 9, commits $280 billion, much of which is not appropriated, to bolstering chip production in the U.S.

The bill had bipartisan support in the House and also in the Senate, indicating politicians on both sides of the aisle recognized the need to step up efforts for on-shoring chip production.

The CHIPS Act and Inflation Reduction Act complement each other. How politics and business go together is an interesting study.

CHIPS Act

Chips for America Fund; creates incentives to produce semiconductors. Total of $52.7 billion, $39 billion of which is set aside for incentive programs to promote manufacturing. $37 billion for assistance for construction and expansion of semiconductor fabrication facilities.

$2 billion for chips used in automotive and defense systems

$11 billion for semiconductor manufacturing research and workforce development

$2 billion for CHIPS for America Defense Fund

Plus:

$1.5 billion dedicated to a public wireless supply chain innovation fund to spur movement to open-architecture, software-based wireless technology. Designed to promote 5G networks throughout the U.S.

The biggest chunk of $200 billion is designated to support R&D in advance and emerging technologies. Much of the money will go to the National Science Foundation to increase research. The U.S. Energy Department’s Office of Science will receive up to $50 billion to enhance a series of programs focused on clean energy, nuclear physics and high-intensive lasers as they relate to semiconductor manufacturing. Also, the bill will establish 20 regional technology hubs to create more chip manufacturing employment.

The bill also includes money for NASA for research that will lead to bringing Americans to Mars and put the first woman and first person of color on the Moon.

The advance manufacturing investment credit: a 25% tax credit on qualifying investments or tangible property

Must be integral to the operation of an advanced manufacturing facility.

Must be constructed, reconstructed, or erected by the taxpayer.

Used for building and structural components, not for office, administrative or other functions unrelated to manufacturing. Demonstrating that will require a cost segregation study.

Can be used as a payment against tax for the year of the credit.

Subject to recapture but recapture amounts drop by 20% per year.

Reduces the basis of the property by the amount of the credit.

CHIPS Act investments should free us from exposure to Chinese supply chain issues and restore manufacturing jobs in U.S., including 3,000 new jobs with Intel in Ohio. That and spinoff businesses and employment combine for a potential boon to Ohio’s economy and other Midwest states. Likely to take three to five years to build Intel plant and get it running. South Korea will spend 450 billion and China will invest $1 trillion in semiconductor production over the next ten years. These investments will improve our viability in this very important industry.

Inflation Reduction Act

Signed into law August 16 by President Biden.

Whether or not it will reduce inflations is up for debate.

There are tax implications for some large companies and a slew of legislation to provide new credits and extend existing credits for clean energy.

Boosts budgets for the IRS whose resources have been gutted in recent years. Added IRS support is not designed to affect taxpayers making less than $400,000 per year.

Provides for an excise tax on large company stock buy-backs.

Returns a corporate minimum tax of 15 percent of the corporations’ adjusted financial statement income (AFSI) over its corporate AMT foreign tax credit. Applies to C-corps with an average annual incomes of more than $1 billion AFSI.

Has some adjustments, including taking accelerated depreciation and foreign tax credits: applied to taxable years beginning after 2022.

Designed to base current year tax on book income, which can be larger than tax income. Represents a change in the dynamics of U.S. tax law, where corporate taxes are generated from book income.

Excise tax of 1 percent on stock buy-backs by publicly traded corporations for tax years after 2022. Should not affect small, closely held businesses.

Extends excess business loss limitation for non-corporate taxpayers two years. Won’t be able to take a business loss deduction of more than $524,000 for joint filers, $262,000, filing individually. Any excess carries forward like a net operating loss. Excess business loss limitation was included in the Tax Cuts and Jobs Act.

IRS funding:

Funding had been reduced or cut in recent years leaving IRS with a lack of workers and outdated equipment.

Inadequacies became apparent during the pandemic.

Funding of $80 billion is to close the “tax gap” which is the difference between what should be collected by the IRS and what is actually collected.

Wants to hire 87,000 new workers over the next decade.

No IRS changes other than funding, again, to be used over the next ten years.

Should improve customer service and increase audits on large corporations.

The Act also:

Extends for three years Affordable Care Act subsidies ($84 billion)

Prescription drug reform to lower drug prices ($288 billion); Excise tax on drug companies that don’t comply could be onerous

Drought relief ($5 billion)

Intends to provide for a deficit reduction of $308 billion

Extends the insurance tax credit

Electric Vehicle tax credits

Extends current $7,500 EV tax credit through 2032

Credit of $4,000 for used cars priced $25,000 or less

Removes 2000,000 per manufacturer vehicle cap beginning in 2023

Requires U.S. assembly and encourages domestic sourcing of key battery materials

Income thresholds for buyers; cost limitations on vehicles

Applies for some plug-in hybrids

Clean energy tax credits:

Clean hydrogen production

Advanced manufacturing production

Nuclear power production

Extension of renewable electricity production

New clean energy products

Credit for residential clean energy

Credit for energy efficiency home improvements

-Deduction for energy improvements in commercial buildings

-R&D tax credits of up to $250,000 against payroll taxes for businesses with less than $5 million gross receipts and less than five years old

Many of the tax increases that were included in the Build Back Better plan are not in the Inflation Reduction Act.

Highlights from the July 20, 2022, webinar hosted by Corey Shaner, HBK Director of Business Intelligence, and Amy Reynallt, MBA, Senior Manager, HBK Manufacturing Solutions.

Business Intelligence is a new service offering at HBK designed to help businesses understand the value of leveraging data to drive decision-making and improve performance. Recognizing the value of connecting tables of data, businesses can create a dashboard using a tool called Power BI that allows business to spend time spotting and acting on trends in their businesses rather than analyzing data.

“What gets measured gets managed.” – Peter Drucker

As an organization matures, there is a need for more information, but it may not exist because it wasn’t measured. There is an opportunity to put in place a way to capture data points that will allow you to measure a process or person better.

Our lives are becoming increasingly connected by the devices we use for work and leisure each day. If data can be harnessed and packaged appropriately, we can deliver the information we need to enhance the performance of our organization.

By 2025 the world will create 181 zettabytes of data annually, so much data it would require seven Empire State buildings full of servers to capture it all.

Business Intelligence helps organizations analyze historical and current data so they can quickly uncover insights for making strategic decisions. Business intelligence tools make that possible by processing large data sets across multiple sources and presenting the findings in visual formats easy to understand and share.

Start the process of implementing business intelligence tools by understanding the wants and needs of key stakeholders in order to complete a Business Requirement Document as the roadmap for the project. The completed document will include identification of the software program needed to complete the process. Once the software vendors have amassed the data and granted access, the developers will create APIs that extract the client’s data from the vendor’s database, which can then be transformed if needed and loaded into a data warehouse where BI tools can be used to display the performance metrics. The warehouse can be hosted on a client-owned server or in a cloud-based environment, most commonly a SQL warehouse.

In the warehouse we’ll see multiple tables of data. Each table has a primary key structure, which allow us to connect tables and pull previously unrelated information together. The discovered relationships should be documented in a catalog that acts as the playbook for developers and helps keep projects on track in case of employee turnover.

The dashboard and reports provide real-time insights into the performance of the business, real-time analytics that highlight opportunities and potential problems as they occur so decision makers can make data-driven decisions faster, including creating predictive models that can be used for budgeting and forecasting.

Two platforms for dashboards and reports are Power BI and Tableau. They allow the used to consume the information and make data-driven decisions in real time.

Power BI: Power BI is the preferred application, for one, because it allows integration seamlessly with other Microsoft products. Features includes:

• Power Apps for application development
• Power Automate for process automation based on triggers
• Power Virtual Agent: an AI-based tool that connects consumers with staff by recognizing keywords

Power BI is extremely efficient in the way it stores and displays large amounts of data. Dashboards are completely customizable, including changing formats to accommodate whatever level you are targeting or benchmarking.

The process produces reports that can be saved in a variety of ways, including producing an app, a preferred way to get information to the user. The reports could generate questions about employees or processes. Whatever the case is, there’s a way to measure it and eliminate future problems. Power BI can be used to measure any kind of information, financial or operational, for which data exists.

Highlights from the June 15 webinar hosted by Amy Reynallt, Senior Manager and Co-Director, HBK Manufacturing Solutions

Manufacturer Challenges

The surprise is not about the challenges themselves, including labor shortages, supply chain interruptions, and inflation, but how long they have persisted.

Manufacturers are struggling to hire as well as maintain workers. We are seeing higher turnover numbers because of:

• increases in compensation
• workers seeking a different environment or looking for more flexible workplaces, which is hard to offer for many manufacturers, including those with continuous processes.

Unemployment is low, at 3.6 percent at the end of May; anticipating unemployment will remain below 4 percent through 2024.

Growing compensation: Wage growth is slowing, but manufacturers have seen compensation increase dramatically in the past year. It continues growing if at a slower pace.

Supply chain disruption continues and the question now is how long into 2023 before we see some relief; the timeline is being extended. Imports are back up, but manufacturers using domestic suppliers still face significant challenges in terms of delays and cost increases.

Current trends:

• away from single source supply to having a second or third source to ensure availability
• away from just-in-time to just-in-case inventory

Costs and inflation:

• Cost of freight and fuel increasing significantly, but also for raw materials and labor—costs across the board
• Government will continue to make adjustments in an effort to address inflation, but increased interest rates will make borrowing more expensive.
• Capital purchases remain strong, but increased interest rates may level or decrease capital purchases

Increasing Prices

Considerations include the cost of making products is increasing due to increases in costs of materials, competitors’ pricing, customers’ demands, customers’ alternatives, contractual obligations which prevent manufacturers from changing prices, and projected costs. We look at these issues even under normal circumstances, but more critically in the current environment.

Customers expect price increases, so manufacturers shouldn’t have trouble passing along their increased costs. But it could be challenging with certain types of customers, such as larger customers.

Ways to increase prices:

• Some are using a surcharge as a way to pass along increased costs, such as a fuel surcharge; surcharges might be a quicker way to increase prices than raising product prices.
• Some tie increases to an index, but have to be careful about the timing of the index release and its relevance to your operation.
• Some are working escalator clauses into a contract for automatic price rises as certain costs increase.

Be cautious about using volume-based pricing in light of labor or supply chain disruption which could leave you unable to fulfill the volume discount.

Need to mitigate supply chain disruption:

• Forecasting will help you look for the best way to keep costs as close to current as possible.
• Quick pay discounts are a win-win option.
• Blanket orders have been a popular way to plan future needs, but manufacturers need to ensure you can meet blanket orders before offering them.
• Pressures on supply chains lead to questioning the value of lead-time penalties that could damage relationships with suppliers.

Best practices include giving advance notice to customers on upcoming price increases. But have to consider how to adjust when the trend turns around to decreasing prices.

Evaluating Performance

Carefully monitor key indicators of performance, including:

• Raw material costs as a percentage of sales
• Raw material price various/usage variance compared to price increases, including considering alternative materials. Have to keep an eye on the impact of changes on your costs, including overhead costs.
• Total compensation as a percentage of sales
• Labor costs variance: what you were paying previously versus now, but also other pieces than just wages, like increased employee taxes and employee insurance costs
• Freight costs vs. reimbursements: what you are being charged as well as what you are charging customers
• Margins: to ensure profitability levels are what they need to be
• Absorption vs. variable costing: a variable costs model as a management tool; determine contribution margin, then how fixed overhead and SGA costs impact that to determine operating income.

Forward-thinking

Use a continuous or rolling budget for a future focus:

• Similar to looking at trailing 12 months, but looking forward, changing the budget month by month
• Allows for continuously changing and updating for new circumstances.
• More time-consuming than calendar-year budgets, but a mechanism to accommodate changes and ultimately plan for what’s ahead

Keys Takeways:

• Continue to communicate with customers and suppliers.
• Actively manage your financial situation.
• Look at how your costs are changing, the impact on your business, and how to increase customer prices as quickly and effectively as possible.