Manufacturers: Implement Year-End Tax Strategies and Lower Your 2024 Tax Bill
Posted by Kristin Re’ on October 08, 2024
As the year comes to an end, manufacturers have a limited window to implement tax strategies that could significantly reduce their 2024 tax liabilities. While key provisions of the Tax Cuts and Jobs Act (TCJA) continue to offer substantial benefits, newer incentives from the Inflation Reduction Act (IRA) and the CHIPS Act also provide opportunities for year-end tax planning.
Section 179 Expensing Election
Manufacturers can continue to benefit from enhanced depreciation rules under the TCJA. The Section 179 expensing election for 2024 allows businesses to deduct up to $1.22 million, with a phaseout starting when purchases exceed $3.05 million. By purchasing new or used assets such as machinery, equipment, software, or business vehicles before the end of the year, manufacturers can lower their tax bill. Additionally, improvements to facilities, such as roofing, HVAC, and security systems, are also eligible for immediate expensing.
Keep in mind that the Sec. 179 deduction is limited by your business income. Any excess can be carried forward or deducted using bonus depreciation, which has no dollar limits or phaseouts.
Bonus Depreciation
The opportunity to claim 100% bonus depreciation is gradually phasing out. For 2024, the bonus depreciation rate has dropped to 60%. Manufacturers planning to make significant purchases early in 2025 should consider accelerating those purchases to 2024 to take advantage of a larger immediate deduction. Eligible assets include machinery, equipment, software, and office furniture with a useful life of 20 years or less.
However, accelerated depreciation may not always be the best strategy, especially if you anticipate moving into a higher tax bracket in future years. Additionally, claiming bonus depreciation may reduce the benefits of other tax breaks, such as the Sec. 199A deduction for qualified business income (QBI), which is set to expire at the end of 2025.
Research Credit
The TCJA also made favorable changes to the tax treatment of research and development (R&D) expenses. Manufacturers can now claim the full research credit for direct R&D costs while also recovering their research and experimentation costs under the Sec. 174 deduction. However, the same expense cannot be used to claim both benefits, so it’s important to determine which is more advantageous.
The research credit is an often-overlooked tax break that applies to manufacturers developing new or improved products or processes. We recommend consulting with your tax advisor to ensure the company is maximizing the R&D tax credit as well as R&D amortization.
Newer Incentives
The IRA and CHIPS Act introduced new tax incentives for manufacturers. The Sec. 48D advanced manufacturing investment tax credit allows for a 25% credit on qualified investments in semiconductor manufacturing facilities or equipment used for semiconductor manufacturing. Manufacturers can claim this credit for 2024 if they place eligible property in service by year-end.
Additionally, the Sec. 45X advanced manufacturing production credit is available for the production of certain components, such as solar and wind energy parts, batteries, and critical minerals. The credit amount depends on the volume of eligible components produced during the tax year, so increasing production in the final months of 2024 can maximize this benefit.
Take Action Now
To make the most of these tax-saving opportunities, manufacturers need to act promptly. Contact us for guidance on implementing the most effective year-end tax strategies for your business. We’re here to help you reduce your 2024 tax bill and position your company for long-term success.
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As a principal 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. She is involved with Firm recruitment and hiring, is a member of the Lumsden Manufacturing team, and serves as co-chair of the Firm R&D tax credit department.