Running a manufacturing business is challenging, even in the best of times. Now, with the coronavirus pandemic in full swing, there’s a new and growing list of challenges to overcome.
Topping the list? Funding to ensure on-going business operations in tandem with the safety and well-being of employees, unpredictable customer demand and supply chain disruptions. It only makes sense to examine all opportunities to minimize your tax burden to free up operating capital. But to do so, you need to know which tax incentives are worth considering. To help, here are five valuable tax incentives for manufacturing businesses.
1. CARES Act
As you may be aware, the CARES (Coronavirus Aid, Relief and Economic Security) Act was signed into law by President Trump on March 27, 2020. Effective immediately, it contains significant tax provisions designed to provide refunds from previously paid income taxes, and can help reduce future tax liability to sustain the ongoing operations of your business. This Act also increases the significance of the Research & Development (R&D) Tax Credit as a critical consideration in your tax planning strategy (more below).
Summary of important tax provisions:
- NOLs (Net Operating Losses) incurred in 2018 and 2019 can now be carried back to offset taxes paid in any of the previous five years
- You will receive a check back for the refund due
- NOLs incurred in 2020 can be carried back to offset taxes paid in any of the previous five years
- You would receive a check back for the refund due
- NOLs incurred for 2018-2020 can be carried forward to offset future taxable income
- You could reduce or eliminate future tax liabilities
Actions you can take right now:
- Whether you were profitable in 2018-2019 or not, consider claiming the R&D Tax Credit
- The R&D credit offsets taxes paid in 2018-2019 and can be carried back one year to offset taxes previously paid — You will receive a refund
- The R&D credit can also be carried forward up to 20 years to offset future tax liabilities
- Work with your CPA to discuss appropriate actions for 2018-2019
- Work with your CPA to discuss your tax planning strategy for 2020
2. Research and Development (R&D) Tax Credit
Not only can you claim the R&D Tax Credit to reduce your federal tax burden, most states also offer this credit. And it's not just for the big companies, either. Small manufacturing companies with revenue of over $5 million often find claiming the credit very beneficial. You may not know this, but there are likely a number of activities you perform and expenses you pay every day that qualify for this credit. Those include:
- Sales Time (determining requirements, quoting, etc.)
- Design Meetings (collaboration among staff, etc.)
- Flat Blank Layouts (design modifications, etc.)
- Tool Making (design, build, tryout, etc.)
- Engineering Process (new equipment, shop redesign, etc.)
- Proof of Concept (process documentation, etc.)
- Trial Production Run (first run of a product, etc.)
- Quality Approval (PPAP, ISIR, etc.)
- Shipping (package design, etc.)
It's also important to note that manufacturing activities that improve an existing product or process may qualify for the tax credit, too.
GET THE GUIDE: 9 Manufacturing R&D Tax Credits Explained
3. Jobs Tax Credit
Manufacturers likely overlook the Jobs Tax Credit because they aren’t aware of the role their location plays in qualifying for it.
If your company operates in certain locations, such as an enterprise or opportunity zone, or an underdeveloped census tract, you may qualify for a credit for the new jobs you create each year. The state in which you are located will provide the guidelines to be followed for this credit.
4. Retraining Tax Credits
If you train your employees to improve skills related to equipment, technology, processes, or software, you can claim these expenses as a tax credit — outside instructor costs and materials, employee wages during training, and qualified travel costs.
Check with your State’s requirements to ensure your training qualifies for a Retraining Tax Credit. For example, if your company is located in Georgia, the Technical College System of Georgia is the source of approval for this tax credit.
5. Work Opportunity Tax Credit (WOTC)
If your company hires individuals who have consistently faced significant barriers to employment, you likely qualify for the Work Opportunity Tax Credit.
The target groups that qualify for WOTC include:
- Qualified IV-A recipients
- Qualified veterans
- Designated community residents (DCR)
- Vocational rehabilitation referrals
- Summer youth employees
- Supplemental nutrition assistance program (SNAP) recipients
- Supplemental Social Security Income (SSI) recipients
- Long-term family assistance recipients
- Qualified long-term unemployment recipients (added when the PATH Act took effect)
You may claim either your business income tax liability or social security tax you owe for the Work Opportunity Tax Credit.
Since filing for these tax credits can be complex, you may want to talk with a tax professional to ensure your company’s activities qualify and you have the necessary documentation to file your claims.
Read here how one manufacturer took full advantage of the R&D Tax Credit tax incentive to achieve $6K+ savings per hour invested in their study.