Key Midyear Tax-Reduction Strategies for Manufacturers
Posted by Kristin Re’ on July 02, 2024
As July marks the midyear point, it is an opportune time for manufacturers to evaluate their tax positions and implement strategies to minimize their 2024 tax liabilities. Each manufacturing company's circumstances are unique, but here are seven critical tax-reduction strategies to consider:
1. Invest in New or Used Equipment
Leveraging the Section 179 expensing deduction, manufacturers can fully deduct the cost of qualifying new or used equipment, such as milling or drilling machines, up to a $1.22 million limit for 2024. Exceeding the $3.05 million threshold reduces the deduction on a dollar-for-dollar basis. Note that deductions cannot surpass net taxable income from business activities. If full deduction via Sec. 179 is not possible, equipment may qualify for 60% first-year bonus depreciation, with remaining costs depreciated over time. We recommend consulting with your tax advisor when evaluating Section 179 versus bonus depreciation as the decision can impact certain tax credits and incentives.
2. Engage in Research and Development
Investing in technology can enhance future productivity and operational efficiency. Manufacturers should assess if their research and experimentation expenditures qualify for the R&D credit, which is typically 20% of qualifying expenses above a base amount, or 14% if using the simplified credit. R&D expenses must be amortized over five years (if the research is conducted in the U.S.), or 15 years (if the research is conducted outside of the U.S.).
3. Utilize Green Tax Incentives
The Inflation Reduction Act (IRA) offers several clean energy tax incentives for manufacturers, including:
- A new production tax credit for energy-saving property with solar and wind components.
- The revived advanced energy project credit, typically 30% of the cost of constructing or upgrading facilities with qualified property.
- The extended solar investment tax credit (ITC), which now includes various energy conservation technologies and renewable energy components.
- A credit for electric vehicles (EVs), similar to the individual taxpayer EV credit.
4. Maximize the QBI Deduction
Manufacturing companies structured as pass-through entities can benefit from the Section 199A deduction, generally 20% of qualified business income (QBI). For incomes exceeding certain thresholds, additional limitations apply, such as capping the deduction to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of qualified property costs.
5. Enhance Accessibility Accommodations
Tax benefits are available for manufacturers improving accessibility for disabled employees. Companies with prior-year gross receipts of $1 million or fewer or fewer than 30 full-time employees can claim the disabled access credit, effectively 50% of the first $10,000 of qualified expenses, up to $5,000. Additionally, up to $15,000 can be deducted for removing architectural barriers. Both the credit and deduction can be claimed in the same year, provided they are for different expenses.
6. Leverage Targeted Jobs Credits
In a tight labor market, manufacturers hiring from disadvantaged groups can claim the Work Opportunity Tax Credit (WOTC), typically 40% of the first $6,000 of first-year wages per eligible worker, up to $2,400. The WOTC has been extended through 2025.
7. Conduct Facility Repairs
Manufacturers can deduct the full cost of necessary repairs, such as fixing broken windows or leaky roofs, before the year-end rush. Capital improvements, however, must be depreciated over time. IRS safe harbors—routine maintenance, small business, and de minimis—can assist in distinguishing between repairs and improvements.
Act Now
With the summer season upon us, it is crucial to determine the midyear actions most beneficial for your manufacturing company. We can assist you in identifying and implementing these tax-saving strategies.
for more information
As a manager in our tax department, Kristin serves businesses and individuals. She works primarily with commercial entities in a variety of industries, including Partnerships, S-Corporations, and C-Corporations. She has also worked extensively with manufacturers and start-up companies. Kristin helps companies obtain various tax incentives to reduce tax liability and improve cash flow. Her focus is on various federal, state, and local business development incentives, including Start-Up New York, Excelsior Jobs Program, New York State Film Tax credits, and Federal Research and Development tax credits.