It will soon be 2017—can you believe it! What a year it’s been! While much was debated regarding corporate tax structures during the presidential election, things haven’t changed yet. However, as you begin working with your accountant on your business taxes, Plante Moran (Chicago) , a business consulting, tax and wealth management firm, offers six key strategies that manufacturers often miss when doing their taxes.
Research & Development (R&D) Tax Credit. This is something I’ve written about annually, but at the end of 2015, Congress enacted and the president signed into law a permanent R&D credit. This eliminated the need for ongoing renewal of the temporary R&D credit, and gave manufacturers some expanded valuable benefits. Remember that you don’t have to be an official researcher to qualify for the tax credit—moldmakers do a lot of R&D activities developing new designs for molds, trying them out and making new iterations. That’s R&D, folks! Further, says Plante Moran, when a manufacturer works to improve the function, performance, reliability or quality of products or processes, those costs may also qualify for the credit if they meet appropriate criteria. Processors do a lot of this on a daily basis. Just remember to keep good records of these activities. New provisions enacted with the permanent credit provide additional benefits for startups and small to midsized growing businesses. Companies that have been in business for less than five years and have receipts of less than $5 million may be able to use the credit to offset some payroll taxes. Businesses with average annual gross receipts of less than $50 million for the last three years may be able to use the credit to offset alternative minimum tax liability, Plante Moran explained.
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- Domestic Production Activities Deduction (DPAD). Plante Moran says this provision was enacted to encourage manufacturers to keep production activities in the United States. (Maybe someone needs to inform President-elect Trump of this provision.) It’s a fairly complicated calculation to determine the activities that quality, but it can result in savings of 9% on income attributable to qualified activities, notes Plante Moran. “The IRS is in the process of finalizing regulations regarding key considerations of its application,” says Plante Moran. “At this time, the draft guidance suggests that the IRS may try to clarify several issues, including who gets to claim the DPAD in a contract manufacturing agreement.” (That would include many processors and moldmakers.)
- Interest Charge-Domestic International Sales Corporations (IC-DISCs). This is a “separate” company that’s made an election under the IRS code that helps U.S. manufacturers exporting goods to achieve significant tax savings. A commission is earned based on the sale of U.S. manufactured goods for use outside the United States. The IC-DISC is not taxed on its commission income, and earnings are distributed to shareholders (who usually are also owners of the U.S. business) as dividends. The IC-DISC shareholders pay tax on those distributions at the capital gains rate (typically 20%) instead of the individual income tax rate (as high as 39%).” Plante Moran says that it finds that “closely held businesses with qualified export revenues exceeding $1 million seem to gain the most from this structure, but almost any U.S.-based exporter can derive some benefit from an IC-DISC.” Despite the significant tax savings, manufacturers who export (such as some mold manufacturers that export molds to customers in foreign countries) often hesitate to create one of these corporations due to some common misconceptions: Incompatible corporate structures (customized planning can help many businesses comply with the rules and qualify for the tax-advantaged distributions) and high compliance costs after setup. Plante Moran says that this “does require outside assistance in most cases, but we’ve found that if the economics of the business suggest that an IC-DISC is a good choice, the annual tax savings are a multiple of the costs of compliance.”
- Transfer Pricing. This is primarily for companies that have international supply chains and production processes and may not be applicable to many small to mid-sized plastics businesses. Larger companies most likely already know about this and find it helpful for their global businesses.
- State Nexus Studies. “One of the most significant state tax trends in the United States in recent years has been the active expansion of the concept of ‘nexus,’ which is having enough contact with a state to be subject to its taxes,” says Plante Moran. “With certain exceptions, nexus was historically based on a physical presence in a state, like owning or leasing property. Nexus might also be created by employees or independent contractors working in a state on behalf of the company.” Plante Moran notes that “many states are challenging the traditional standard to assert that nexus may exist via some types of virtual presence, even in the absence of a physical presence.”
- The Federal Work Opportunity Tax Credit (WOTC). If your business hires individuals who are members of “targeted groups” under the federal WOTC, such as veterans and federal assistance recipients, you need to take advantage of this credit against “federal income taxes for up to 40% of the first-year wages paid to those employees, up to $9,600 per qualifying employee,” explains Plante Moran. “A recent change expanded the list of targeted groups to include those unemployed for longer than 27 weeks.” Many companies hire these individuals without realizing that they’re part of a targeted group, and Plante Moran suggests that you may want to incorporate the prescreening forms into your hiring process to ensure you can take advantage of this tax credit.
Plante Moran also suggests that you start planning now for your 2016 tax returns to make sure you don’t forget something that could get you a nice tax break. It’s also good to start thinking about keeping good records in the coming year so that you have all your ducks in a row from the get go!