Webinar: Tax Planning for Manufacturers

Date November 16, 2022

Highlights from the November 16, 2022, HBK Manufacturing Solutions webinar hosted by James Dascenzo, CPA, Principal, National Director of HBK Manufacturing Solutions; Nicholas Demetrios, CPA, MBA, Principal, HBK Tax Advisory Group; and Amy Reynallt, MBA, Senior Manager, Regional Director of HBK Manufacturing Solutions

The webinar is broadcast in November to give manufacturers time to react to tax planning. Key tax planning considerations include:

Inflation Reduction Act provision don’t go into effect until 2023. The new funding for the IRS and additional employees will result in a heightened awareness and intent to close the tax gap by reviewing more taxpayer returns. The Act provides for more auditors, more people behind the scenes, improved technology. Funding extends for 10 years.

Cash Method of Accounting: One of two methods, cash and accrual. Accrual moe applicable to GAAP principles and financial statements; cash method can be used by taxpayers with grow receipts under $27 million over a three-year average. Cash method can better match deductions and income. Can put the company in better position to accelerate deductions and defer income.

  • Planning is much easier under cash than accrual method, because expenses are recognized when paid and income recognized when received.
  • Best planning tools allow deferral of income to later years. Makes sense to defer this year into 2023.
  • Major planning issues relative to deductions:

  • Bad debts: need to look into and determine if some accounts are uncollectable to get the deductions
  • Current year bonuses have to be paid by end of year under cash method
  • Should consider taking advantage of passive losses against income
  • Prepayment of taxes: might be deductible if paid before end of the year
  • Tax Credits:

    R&D Tax Credit: A government incentive to complete research and development activities.

  • For manufacturers developing or designing new products or processes or enhancing existing products or processes.
  • About 8 to 10 percent of those expenses would provide an estimate of an R&D tax credit.
  • Have to be substantiated properly.
  • Been in existences since early ‘80s but liberalized in recent years: more available and more opportunities.
  • Software exists to document R&D tax credit activities.
  • Work Opportunity Tax Credit: An incentive to hire people who have historically had difficult obtaining employment, including veterans, individuals on work release programs.

  • Credit is equal to 40 percent of the first $6,000 of wages, except for veterans who can qualify for a higher limit.
  • Credit is often overlooked because of record keeping involved: must be tracked and maintained.
  • Energy Investment Credit: Big focus of Inflation Reduction Act. Available for investments in certain alternative and renewable energy property and renewable electricity production facilities.

  • Credit is equal to 10 to 30 percent of the basis of energy property placed in service during 2022.
  • Incentive for going greener.
  • Business Deductions:

    Business Interest Expense: limited to sum of business interest income, 30 percent of the business’s adjusted taxable income, and floor plan financing interest.

  • Taxpayers with average annual gross receipts of $27 million or less are exempt from limit.
  • For 2022 we cannot add back depreciation and amortization.
  • Should be planned for at least from cash flow perspective.
  • Excess Business Loss: From an individual perspective.

  • Extended by Inflation Reduction Act. Only C Corporations can deduct.
  • Defined as the amount by which aggregate deductions of the taxpayer attributable to the businesses of the taxpayer, less than the sum of aggregate gross income, exceeds $270,00 ($540,00 for married filing jointly).
  • Can be carried forward and treated as net operating loss carry-forward in succeeding taxable years.
  • Equipment Purchases and Bonus Depreciation: Section 179 allows expense of otherwise depreciable business property, including assets not eligible for bonus depreciation, like certain improvements to real property of off-the-shelf computer software, to a maximum of $1,080,000.

  • Again, have to determine how to best match expense against future earnings.
  • Can take income to zero with remaining amount carrying over.
  • For 2022, maximum to be expensed in $1,080,000.
  • Placing property in service in 2022 will be a priority because of phase-out of bonus depreciation from 100 percent of the cost of qualified property through 2022, to 80 percent for property placed in service during 2023, 60 percent for 2024, 40 percent for 2025, 20 percent for 2026.
  • If you are contemplating purchases, buy before the end of 2022; but items must be placed into service.
  • Vehicles weighing over 6,000 pounds are not subject to same deprecation rules as passenger vehicles; can qualify for much greater deductions.

  • Inflation Reduction Act adds credits for electric cards and clean vehicles.
  • Inventories for Subnormal Goods: goods unsellable at normal prices or unusable in the normal way.

  • Deduction for write-downs if offered for sale within 30 days of the inventory date.
  • Other Tax Planning Options:

    Cost Segregation Studies help owners of commercial and residential buildings increase cash flow by accelerating federal tax depreciation of construction-related assets.

  • Cost segregation became a science in the 1990s.
  • Can refer to pieces of a building
  • Expenses can be moved from the 39-year depreciation to take them in current year; or qualify for 5-year, 7-year, or 15-year depreciation.
  • Based on engineering-based methodology of existing, newly constructed, or acquired buildings.
  • Some of the greatest advantages of cost segregation are in the manufacturing space.
  • May be opportunities for any building improvement or buildings acquired in prior years.
  • Interest Charge Domestic International Sales Corporation (IC-DISC): Operating company pays commission to IC-DISC, then IC-DISC issues dividend to its shareholders which are taxed at capital gains rates.

  • Sales by a domestic corporation to foreign countries qualify.
  • Must have only one class of stock with minimum par value of $2500; must pass gross receipts tax and export asset test.
  • LIFO Accounting for Inventory. More accurately reflects income by matching current costs against current revenues.

  • Greatest benefit is in periods of inflation. Eliminates artificial profits from earnings resulting from inflationary increases in inventory costs.
  • Increases cost of goods sold and reduces ending inventory balances in inflationary periods.
  • Reduces taxable income.
  • Manufacturers should consider LIFO unless, typically, inventory is in excess of $1 million.
  • Benefits grow in perpetuity.
  • State Considerations: States have gotten more aggressive in terms of taxation, so need to consider available credits and incentives for states where you reside and others where you do business.

  • In Ohio, municipal income tax withholding; companies must withhold tax based on where employees work, but during COVID, General Assembly directed to withhold based on company location.
  • Also, relative to $10,000 limits on state and local tax deduction: Ohio, like several other states, now allows payment of taxes at entity level to get the deduction.
  • A bill in Ohio in consideration would eliminate personal income tax.
  • International Considerations: Multiple different reporting requirements accompanying ownership of businesses overseas.

    Payroll Tax Credits:

  • COVID-19 expanded sick and family leave; caregiver can receive a tax credit; option for 2022 still exists
  • Employee Retention Credit: available to businesses with significant decline in gross receipts in 2020 or 2021 or business suspension due to a government order; IRS aggressive on eligibility.
  • Must pay deferred Social Security Tax by end of this year
  • Speak to one of our professionals about your organizational needs

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