It is year-end planning season and we want to provide some tax planning ideas to manufacturers. Some of these ideas could apply right away and some are good to know to consider in the future. Here is a list of tax planning ideas that could apply to manufacturers.

• Section 174 costs (Research & Development Costs) – Since 2022, research and development costs (R&D) are required to be capitalized and amortized over 5 years for tax purposes for U.S. operations. If a manufacturer has these R&D costs, this is something that should be looked into further to ensure compliance.
• Section 163(j) (Business Interest Expense Limitation) – If a manufacturer’s business interest expense is limited for tax purposes, there may be an opportunity to allocate some of that interest expense to Section 174 costs (R&D costs). The interest expense won’t be deductible in the first year but will be tax deductible over five years. For example, if a manufacturer has so much business interest expense carryover that they may never recognize the business interest expense carryover as a deduction for tax purposes, then it may make sense to allocate the interest expense to R&D costs if the interest expense is related to R&D.
• Inventory – Look into whether or not the current inventory accounting method of FIFO (First in, First out) or LIFO (Last in, First out)) for the company makes sense. Also, if a manufacturer has more than $30 million of average gross receipts for the prior three years, the company may need to capitalize additional general and administrative costs to inventory for tax purposes.
• Bonus Depreciation – For 2024, bonus depreciation is 60% of the equipment or other tangible property cost and 40% for 2025. In recent prior years, bonus depreciation was 80% or 100% of the equipment or other tangible property cost. Due to the reduction in the amount of bonus depreciation allowed in the first year for 2024 and 2025, it may be more beneficial to take Section 179 depreciation for equipment purchases if the company qualifies for it. With Section 179, 100% of the equipment cost can be expensed in the first year. For many states, Section 179 depreciation treatment is the same as Federal. However, bonus depreciation for many states is different than the Federal treatment and usually results in significantly less or no accelerated depreciation allowed in the first year for the state.
• Tax Credits
  • Research & Development (R&D) credit – Manufacturers may qualify for the research and development tax credit if they develop new manufacturing processes, products or techniques. This could be something to consider since more manufacturers are looking to use AI in their operations. The research credit is about 20% of your basic research payments.
  • Advanced Manufacturing Production Credit (Energy Credit) – This credit is a tax incentive for manufacturers who produce solar, wind and battery components that are produced in the U.S. between December 31, 2022 and December 31, 2032. This credit will begin to phase out starting in 2030. A manufacturer could qualify for up to a 30% base credit if certain requirements are met.
  • Work opportunity tax credit – If a company hires employees from targeted groups, it could yield some income tax credits. There are certain requirements that need to be met to take this credit before someone from a targeted group is hired. If a company is interested in taking this credit, it would be critical to review all of the requirements before hiring someone from the targeted group to prevent them from not qualifying for the credit due to missing something. Also, this credit is set to expire at the end of 2025.
• Purchase of Plant or Building a Plant – If a manufacturer is purchasing a plant or building a facility, they may want to consider a cost segregation study to be able to depreciate components of the property over a shorter period for tax purposes.
• Manufacturers with Foreign Exports – If a manufacturer or distributor is exporting goods to other countries, it may make sense to setup an IC-DISC to convert export income into capital gain rate eligible income.

If you think any of these tax planning ideas would apply to your business or are interested in learning more about it, please contact your Boyum advisor.