Manufacturers have a lot on their plates these days. Complying with COVID-19 safety mandates calls for the use of personal protective equipment (PPE) and greater distance among your employees—perhaps even a staggered workforce to maintain safe distances. Federal loan programs are available to eligible businesses, but they call for ongoing legislative vigilance.
Given these distractions, it’s all too easy to lose sight of valuable tax credits and incentives available to manufacturers. The uncertain economic environment makes it even more essential that you take advantage of opportunities to lower your tax burden and ease cash flow. The following provides an overview of four of the best opportunities for you to put dollars back into your manufacturing operations.R&D Tax Credits for Manufacturers
As your manufacturing business works hard to meet increasing financial obligations and to maintain operations, refund opportunities may be available to you based on prior year research and development (R&D) costs. In addition to providing an immediate source of cash, the R&D tax credit may also offer a substantial reduction to current and future year tax liabilities.
Texas and Federal R&D Tax Savings
The federal R&D tax credit allows a credit up to 10% of eligible expenses—a significant tax saving. The Texas R&D tax credit is 5% of the excess of qualified research expenses in the current period over the base amount.
A careful review of your research costs can help determine if you have expenses that meet the requirements for federal and state R&D tax credits. Eligibility includes taxpayers that are paying income taxes on tax returns between 2016 and 2019 and/or 2020 payroll tax filings. Eligible companies may amend their prior three years’ tax returns to take advantage of the R&D credits related to certain expenses incurred during each previous period.
A four-part test helps to determine which manufacturing activities count as qualified research according to the IRS:
- Permitted Purpose: Activities must relate to new or improved business components, function, performance, reliability, and quality.
- Technological in Nature: Activity performed must fundamentally rely on principles of physical or biological science, engineering, and computer science.
- Elimination of Uncertainty: Activity must be intended to discover information to eliminate uncertainty concerning the capability, method, or design for developing or improving a product or process.
- Process of Experimentation: Taxpayer must engage in an evaluative process that can identify and evaluate more than one alternative to achieve a result.
Qualifying Activities for Manufacturing R&D
The following represents just a sample of activities that qualify for R&D tax credits:
- Design, build and test product prototypes
- 3D modeling and prototyping
- Tooling and equipment design and development
- Improve product functionality, performance, reliability, quality or durability
- Updating manufacturing processes through automation
- Develop computer control programs
- Alternative material testing
- Design and evaluate process alternatives
- Reducing labor and material costs, as well as manufacturing times
R&D Tax Credit Study
The tax credit study required by the IRS is what keeps some manufacturers from claiming valuable credits they have earned. Goldin Peiser & Peiser’s manufacturing tax credit specialists conduct these studies on your behalf and will walk you through the documentation that is necessary to substantiate your claims.
Watch our Webinar on Demand: Tax Credits and Incentives Boot Camp Learn more about eligibility requirements, legislative updates, and examples of qualifying activities and cost savings! Click here to download.
179D Energy-Efficient Commercial Building Tax Deduction
Is your facility designed for energy efficiency? If so, you may be able to save hundreds of thousands of dollars. The Efficient Energy Commercial Building Tax Deduction, commonly called 179D after the section of the tax code, offers tax deductions for energy efficiency in your building’s assets, including the HVAC system, building envelope, and lighting.
Specifically, 179D allows qualified building owners to receive up to $1.80 per square foot deduction for a 50% reduction in total annual energy consumption and power costs. You can take a partial deduction of $0.60 per square foot for the reduction of energy consumption through the building envelope, HVAC, and lighting. To qualify, your building or has to have been completed between 2006 and 2020, and must be certified by a licensed third party as energy efficient. The tax deduction is available through December 1, 2020, and is retroactive to January 1, 2018.Cost Segregation
The CARES Act makes most interior building improvement costs made in 2018 and beyond eligible for Qualified Improvement Property (QIP) treatment and 100% bonus depreciation, resulting in immediate expensing of a substantial amount of renovation costs. The IRS allows property owners to separate components of their buildings so that land improvements and personal property can depreciate at faster rates for cost savings. In other words, you can work with your tax professional to identify assets and determine which costs qualify for accelerated depreciation. This valuable cost-savings tool was enhanced when Congress approved enhanced bonus depreciation in 2017. This means that you may be able to deduct a certain percentage of your costs in the first year your assets are placed in service. Additionally, the bonus depreciation percentage was increased to 100% for assets acquired after Sept. 27, 2017, through tax year 2022. A cost segregation study under the guidance of engineering and tax professionals can help you take full advantage of this valuable cost-savings opportunity.Work Opportunity Tax Credit
The Work Opportunity Tax Credit is a federal credit available to those businesses that hire workers from certain disadvantaged target groups who have consistently faced barriers to employment. Generally, the WOTC is equivalent to 40% of the first $6,000 of wages, for a maximum credit of $2,400 per worker. You qualify after the Texas Workforce Commission shows that the worker qualifies. You can claim the tax credit by completing and submitting IRS Form 5884 with your business tax return.
As the costs of running your manufacturing business increase, these tax credits and incentives will be invaluable in helping to offset your tax burden. GPP’s Specialty Tax Services Group can help manufacturers qualify for these federal and state programs, as well as conduct the cost segregation study and the R&D tax credit study. Contact Kevin Harris, CPA, at 214-635-2473 for more information, and download our Tax Credits and Incentives Webinar-On-Demand.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.