As a member of the manufacturing industry, there are plenty of tax incentives you can use to benefit your business. However, you need to know the finer points to ensure you’re maximizing your tax position. Hear from Daniel Lynn and Derik Rynearson, two tax partners at Beene Garter, as they outline common tax mistakes and planning tips for manufacturers.
Q: What are the most overlooked tax incentives for manufacturers?
Answer: One of the most overlooked tax incentives for manufacturers is the Work Opportunity Tax Credit. This credit is available to employers who hire individuals in certain targeted groups, e.g., veterans, ex-felons, and individuals who have been on state assistance programs.
Businesses can receive a credit of up to $9,600 per employee in the first year, depending on the employee’s targeted group. This credit is particularly beneficial for manufacturers that hire lower-skilled workers and experience a moderate to high level of employee turnover.
Although there’s a fair amount of coverage on the credit for increasing research activities, many manufacturing companies overlook this incentive because they underestimate the number of research activities they conduct. This credit can range from 4.7% to 20% of qualified research expenses. If you commit resources to develop new products and processes, which may involve trial and error in resolving technical uncertainties, you may be a good candidate for this credit.
The tax benefits of LIFO inventory, property tax abatements, and IC-DISCs are also commonly overlooked. If these terms are foreign to you, connect with a tax professional to learn more about them and whether they’re strategies you can use to reduce your taxes.
Q: What are common state and local tax mistakes that manufacturers make?
Answer: The most common mistake I see manufacturers make with regard to state and local taxes is how they source their sales. This isn’t always a simple task and sometimes the mistake is due to limitations of their accounting system. Let’s look at an example.
A widget manufacturer stamps widgets and ships them to customers. The company would source the sales based on the destination of the shipment. It should run a sales-by-state or ship-to-state report based on the destination of the widgets.
As a manufacturer, you should ensure your system is generating the right report and is set to distinguish between where the goods are being shipped versus the billing address. If a customer places an order and the invoice is sent to one location and the goods are delivered to another, you must make sure the sale is sourced to the state where goods are delivered.
Once your tax advisor receives an accurate sales-by-state report, (s)he can put the finishing touches on sourcing sales by considering any applicable throwback rules. Sourcing sales to the correct state is becoming increasingly important for two reasons.
- First, it’s a key component in accurately determining where a taxpayer is subject to tax. This includes income tax, franchise tax, and potentially sales tax. Once you know where you’re subject to tax, it’s critical to know the precise amount of sales in every jurisdiction to know your full tax exposure.
- Second, sourcing sales can impact certain federal tax benefits such as IC-DISC commission calculations, the foreign-derived intangible income (FDII) deduction, and the QBI deduction.
It’s important that every manufacturer discuss how they source sales with their tax professional so they can optimize their federal, state, and local tax positions.