Tag: manufacturing tax credits

Posted on Mar 18, 2016

If you plan to hire new employees this year, you’re not alone. Plus, you may qualify to receive the Work Opportunity Tax Credit.

Employment statistics ended 2015 on a positive note. In addition, roughly 242,000work opportunity tax credit new jobs were added in February and the unemployment rate fell to 4.9%, its lowest level in eight years. Several recent studies indicate that the hiring momentum will continue in 2016. Hiring new employees could also earn you a credit on your tax return, if you meet certain requirements. The Work Opportunity tax credit is a tax break for qualified wages paid to new employees from certain targeted groups. This credit has undergone several changes since it was introduced nearly 40 years ago. The most recent extension of this credit — under the Protecting Americans from Tax Hikes (PATH) Act of 2015 — retroactively renews the credit for 2015 and extends it through 2019.

Understand the Mechanics of the Work Opportunity Tax Credit

The Work Opportunity tax credit applies to wages paid to a new hire from a targeted group who works for your business at least 120 hours during the first year. If a new employee works at least 400 hours during the first year, the credit equals 25% of his or her qualified wages, up to the applicable limit. The percentage rises to 40% if the new employee works more than 400 hours.

In general, the credit applies to only the first $6,000 of wages. But there are a number of exceptions, which we’ll discuss a little later. In addition, you may qualify for a credit of 50% of qualified second-year wages (in addition to first-year wages) if you hire someone who’s certified as a long-term family assistance recipient.

Here’s an example illustrating how this credit works: Suppose you hire Fred, a qualified veteran who was unemployed for six months before you hired him. He works for you for nine months and earns $500 per week, which equates to $19,000 in the first year. An added bonus is that Fred falls into a special targeted group of veterans and, based on his circumstances, he qualifies you for a credit on his first $14,000 of wages.

Because Fred worked more than 400 hours at your business, you earn a credit equal to 40% of his wages up to $14,000. In other words, your Work Opportunity credit is $5,600. However, you also must reduce your deduction for wages by the amount of the credit. So, your wage deduction for paying Fred is $13,400, and your credit is $5,600.

Important note. Typically, a credit will provide greater tax savings than a deduction of an equal dollar amount, because a credit reduces taxes dollar for dollar. A deduction reduces only the amount of income that’s subject to tax.

There’s no limit on the number of eligible individuals your business can hire. In other words, if you hire 10 people exactly like Fred, your credit would be $56,000.

Work Opportunity credits generated by pass-through entities, such as S corporations, partnerships and limited liability companies, pass through to the owners’ personal tax returns. If this credit exceeds your tax liability, it may be carried back or forward.

Know the Targeted Groups and Qualified Wage Limits

To determine whether you qualify for this tax break, first determine if a new hire belongs to one of these targeted groups:

  • Long-term family assistance recipients,
  • Qualified recipients of Temporary Assistance for Needy Families (TANF),
  • Qualified veterans,
  • Qualified ex-felons,
  • Designated community residents who live in empowerment zones or rural renewal counties,
  • Vocational rehabilitation referrals for individuals who suffer from an employment handicap resulting from a physical or mental handicap,
  • Summer youth employees,
  • Supplemental Nutrition Assistance Program benefits recipients, or
  • Supplemental Security Income benefits recipients.

Starting in 2016, the list of targeted groups has been expanded to include qualified long-term unemployment recipients, which is defined as people who have been unemployed for at least 27 weeks, including a period (which may be less than 27 weeks) in which the individual received state or federal unemployment compensation.

Special rules apply to summer youth employees, and the first-year qualified wage limit for them is only $3,000. In addition, there are four categories of veterans with qualified wage limits of $6,000, $12,000, $14,000 or $24,000, depending on his or her circumstances. The highest qualified wage limit for veterans ($24,000) goes to those who are entitled to compensation for a service-connected disability and unemployed for a period or periods totaling at least six months in the one-year period ending on the hiring date.

The next step is to evaluate whether a new hire meets the other requirements of the credit. You won’t be eligible for any credit if a new employee:

  • Worked for you fewer than 120 hours during the year,
  • Previously worked for you, or
  • Is your dependent or relative.

You also can’t claim a credit on wages paid while you received payment for the employee from a federally funded on-the-job training program. And you can take the credit only if more than 50% of the wages you paid an employee were attributable to working in your trade or business.

Obtain State Certification

Last but not least, to take this credit, you must be able to show proof from your state’s employment security agency that the employee is a member of a targeted group. In order to do this, you must either:

  1. Receive the certification from the state agency by the day the individual begins work, or
  2. Complete IRS Form 8850 on or before the day you offer the individual a job and receive the certification before you claim the credit.

If you use Form 8850, it must be submitted by the 28th calendar day after the individual begins work. On March 7, the IRS extended the deadline until June 29, 2016, for employers to apply for certification for members of targeted groups (other than qualified long-term unemployment recipients) hired (or to be hired) between January 1, 2015, and May 31, 2016. Qualifying new hires must start work for that employer on or after January 1, 2015, and on or before May 31, 2016.

June 29 is also the extended deadline for employers that hired (or hire) long-term unemployment recipients between January 1, 2016, and May 31, 2016, as long as the individuals start work for that employer on or after January 1, 2016, and on or before May 31, 2016. For long-term unemployment recipients hired on or after June 1, Form 8850 must be submitted by the 28th calendar day after the individual begins work.

The IRS is currently modifying the forms and instructions for employers that apply for certifications for hiring long-term unemployment recipients. But it’s expected that the modified forms will require new hires to attest that they meet the requirements to qualify them as long-term unemployment recipients. Guidance from the U.S. Department of Labor states, “In the interim, employers and their representatives are encouraged to postpone certification requests for the New Target Group until the revised forms are available.”

Timing Is Critical

If you’re planning to hire new employees in 2016, the Work Opportunity credit offers a simple way to lower your tax liability. It doesn’t require much red tape, except for obtaining a timely certification of the employee from your state employment security agency. Your tax adviser can help you determine whether an employee qualifies, calculate the applicable credit and answer other questions you might have. But, if you postpone applying for certification, you could lose out.

 

If you have questions about the Work Opportunity Tax Credit, ask Gary Jackson, tax partner at Cornwell Jackson. We’re here to help.

Related Posts

Posted on Mar 10, 2016

The shackles are off. The expanded Section 179 deduction and first-year bonus Manufacturer PATH Act Tax Breaksdepreciation deductions are restored, with certain modifications, retroactive to the beginning of 2015. You can combine these two tax breaks with your company’s regular depreciation for a generous write-off of business assets.

The Protecting Americans from Tax Hikes- PATH Act which was signed into law on December 18, 2015, allows your business recover the cost of qualified business assets placed in service during the tax year within generous limits. These are the three main types of write-offs now available.

  1. Section 179 deduction. Your business can expense the cost of new or used business property up to the maximum threshold for the tax year (see the article in the box below). The expanded limits provide a near-instant tax break for most small and midsize manufacturers. But the property must be placed into service during the year, not just purchased by year end. The PATH Act retained and made permanent the 2014 maximum $500,000 allowance for qualified property. This limit will be indexed for inflation beginning in 2016.
  1. Bonus depreciation. The PATH Act restores the 50% first-year bonus depreciation retroactive to the beginning of 2015. It also extends the tax break for several years, along with a few technical modifications, under this schedule:
50% through 2017
40% for 2018
30% for 2019

Bonus depreciation applies to only new assets, not used ones. The bonus depreciation program is set to expire in 2019, unless Congress reinstates it.

  1. Regular depreciation. For federal tax purposes, depreciation deductions for business assets placed in service are typically calculated under the Modified Accelerated Cost Recovery System (MACRS). That method uses a graduated percentage based on the useful life of the property that lets you write off the cost earlier than the straightline method. Most types of business equipment are considered to have a seven-year useful life. Computers are classified as five-year property.

MACRS treats property placed in service at any point during the year as being placed in service on July 1 under a “midyear convention.” This allows your business to benefit from a half-year’s deduction even on property placed in service late in the year.

Important note. Deductions may be reduced if more than 40% of the cost of the property (excluding real estate) is placed in service in the final quarter.

Three PATH Act Breaks in Action

This is how you can combine the three tax breaks:

  1. Claim the Section 179 allowance,
  2. Take first-year bonus depreciation on any purchases that haven’t been written off, and
  3. Depreciate the remainder using traditional MACRS tables.

For example, an auto parts manufacturer placed $1 million of new machinery in service in 2015. The machinery has a seven-year useful life. Assuming the company didn’t make any other qualified purchases, it can maximize the combined deductions in 2015:

Section 179 deduction. It would first claim an immediate Section179 deduction of $500,000, or half of the cost, leaving a balance of $500,000.

Bonus depreciation. Then, it would take a bonus depreciation deduction equal to 50% of the remaining balance, or $250,000.

MACRS deduction. Finally, using the table for seven-year property, it could write off 14.29% of the remaining $250,000 cost of the property, or $35,725.

The total deduction for all three tax breaks is $785,725. Only $214,275 of the $1 million cost remains to be depreciated over the next six years.

Also, note that the MACRS percentage for seven-year property jumps to 24.9% of the cost in the second year. In the example provided, the company would be able to deduct another $62,250 in the second year. In other words, you can essentially depreciate almost 40% of the remaining cost (14.29% plus 24.9%) in the first two years.

Two Key Limits under Section 179

While the PATH Act permanently preserves the generous $500,000 Section 179 allowance, it encompasses two other important provisions:

Income limit. The Section 179 deduction can’t exceed your net taxable income from business activities. For example, if your business generates $400,000 a year in net taxable income and it places $450,000 of business property in service, the deduction is limited to $400,000. Bonus depreciation can be used to reduce your taxable income below zero, however.

Spending threshold. If the cost of assets exceeds an annual threshold, the maximum Section 179 deduction is reduced on a dollar-for-dollar basis. This threshold was moved in lockstep with the allowance, but now the PATH Act retains a $2 million limit, retroactive to 2015 (subject to indexing starting in 2016). If you placed in service $2.1 million of assets last year, for example, the Section 179 deduction is reduced to $400,000. The bonus depreciation program isn’t subject to a spending limit, however.

Professional Advice

Factor these enhanced tax breaks into your plans for purchasing equipment and you likely can substantially reduce your company’s tax liability. Contact your Cornwell Jackson tax adviser for more details on these tax-saving opportunities, including any rules and restrictions.

Related Posts

Posted on Mar 4, 2016

manufacturing audit, R&D credit, icdisc, manufacturing tax credits, manufacturing dallas, manufacturing employment

In the past year, manufacturing employment in the Dallas/Fort Worth area has dropped by 2 percent. This statistic alone seems negative, but the overall outlook for manufacturing is trending positive with increased focus on innovation, simplified supply chains, diversification into customer-focused services and creativity with materials performance and fuel sourcing. It’s still a challenging industry, but this real or perceived lull in growth is the perfect time to assess the structure and vision of your company. Strengthen the basics with strategic planning to be ready for what’s next.

Strategic PlanningManufacturing Outlook

A slower year or two for revenue may be the opportune time to pursue a transfer of assets to the next generation. If earnings are down 15-20 percent, for example, savings on the transfer and estate tax can be significant if owners act now.

Also, if year-to-year revenue continues to be flat or even less than the previous year, your CPA can help you consider reporting an operating loss and cleaning up the books through carrybacks and refunds from years when revenue was higher.

Even if the company is in good financial health and sustaining a moderate profit, now may be a good time to revisit the company vision, your business model, your KPIs and your tools for tracking them. There are many more integrated solutions that tie the sales side of the house to supply chain, to production and all the way through to realization. Leaders should take time now to explore and demo these various management tools.

Manufacturing Tomorrow

Significant global growth in manufacturing is forecast mainly in Southeast Asia, India, the Middle East and Eastern Europe. By 2025, it is expected that a new global consuming class will have emerged in these developing economies as wages rise and demands for more goods and services increase.

As these manufacturers mature, they will have to focus on reducing costs, appealing to a broader base of customers and finding more skilled workers. In the end, all manufacturers will have to respond faster to market shifts based more on a global pulse than what is happening in their backyards.

In established markets, customers are already dictating variation in products, after-sales customer care and advanced or more environmentally friendly materials. These buyers are doing the majority of research on their own, interacting with the producer only briefly, then hitting the submit button. If they have a bad experience, they report it on social media. Producers are serving increasingly knowledgeable customers who want it their way…or they will go somewhere else.

On the supply side, manufacturers will continue to deal with volatile resource prices and a shortage of highly skilled talent. Difficulty obtaining supplies, regulatory and labor risks and lack of public infrastructure will influence the location and relocation of production facilities.

All of these predictions point to the need for manufacturers to be tech-savvy and globally aware. Even if home base is Dallas/Fort Worth, the market is the world. Work with advisors who recognize this shift. Get your financial and strategic house in order to invest in tomorrow’s opportunities.

If you have any questions about how to add operational efficiencies, reduce taxes or plan for transfer of ownership in your manufacturing operation this year, talk to the manufacturing team at Cornwell Jackson.

GJ HeadshotGary Jackson, CPA, is the lead tax partner in the Cornwell Jackson’s business succession practice. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services to management teams and business leaders across North Texas.

 

Related Posts

Posted on Feb 17, 2016

manufacturing audit, R&D credit, icdisc, manufacturing tax credits, manufacturing dallas, manufacturing employment

Batten the Hatches

In times of uncertainty in the manufacturing industry, it’s natural to huddle up and think through strategies that protect the short-term while preparing for the long game. Companies will often turn to their advisors between waves of growth to review their operations and make sure they are taking every precaution and advantage.

There is always plenty to talk about in manufacturing. As stated in a previous Manufacturing Outlookarticle, the disruption of oil and gas and energy consumption has impacted companies in the region in direct revenue, but also in their relationships with related industries that rely on the oil and gas industry.

Some of the strategies we’ve seen manufacturers employ have included adjustments to work shifts and right-sizing. However, they are also looking at ways to reduce inventory, improve processes, look for tax breaks and even step up estate planning and succession. The following are areas of the manufacturing business that owners and management can review for savings and efficiency.

Tax Incentives/Deductions

Smaller manufacturers don’t always perceive a qualification for the politically popular R&D credit. They should take another look. Some companies have discovered areas defined as R&D under the tax law that fit them perfectly even if they don’t consider themselves innovative. For example, an improved or proprietary process can qualify even if you don’t have an on-site lab or clean room. Also, think about that customer who asked you to make a small adjustment to the machining of a part. If you engineered it, it may qualify as R&D.

When companies are busy, owners or management aren’t always aware of qualifying innovation happening on the production floor. Consult with your CPA to bring those opportunities to light so they are communicated to staff and recorded regularly.

Other tax reduction strategies can be found in how manufacturers handle personal property taxes. Old assets should be removed from the books when new assets are purchased. Some assets may be improperly classified, resulting in overpayment. Many types of “equipment” can be exempt. In addition, certain idle equipment due to lack of demand may also be factored to reduce the personal property tax.

Of course, bonus depreciation is another go-to tax provision. Manufacturers may qualify under fixed asset expensing or through the Domestic Production Activities Deduction (DPAD). This allows for an additional 9 percent deduction of the lesser of taxable income, or 9 percent of “qualified production activities income” (QPAI). QPAI is equal to the amount by which gross receipts from eligible manufacturing and production activities exceed related expenses.

Activities include, but are not limited to:

  • Manufacturing, production, growth or extraction of tangible personal property in the U.S.
  • Construction of real property in the U.S.
  • Performance of engineering or architectural services in the U.S. in connection with real property construction projects in the U.S.

A manufacturer may also qualify for additional tax rate reduction benefits under the interest-charge domestic international sales corporation (IC-DISC). This tax rate reduction is generated by creating a separate entity organized as a C-Corporation. The C-Corp is deemed to participate in the exporting process of the operating entity and earns a “commission.” That commission is paid by the operating entity, and it is an ordinary deduction, reducing ordinary income. Qualification for this type of tax reduction requires exploration of a manufacturer’s operation and sales chain as well as planning to set up the entity.

There are many other areas that manufacturers can explore with their CPA to improve their tax position.

Process Improvements for Manufacturing Operations

Manufacturers can look at various ways to improve efficiencies and reduce waste in the production line as well as save on utilities, maintenance and materials. In addition to integrated components and sensors to alert staff to potential breakdown, the design of production floors can improve workflow and move product out the door faster.

Manufacturers are also looking at simplifying the steps in each manufacturing process to speed production and make training and improvements easier later. Again, some of these may qualify for R&D, depending on the complexity of the changes and their impact on a particular product or the industry itself.

A lean process study and revamping of core processes could provide a double benefit of both improved profitability and production qualifications for the R&D credit.

Labor and Benefits

Texas-based manufacturers may experience more frequent inquiries by state and federal authorities regarding citizenship and fair labor practices.

Immigration and Customer Enforcement (ICE) will look at companies with a large workforce and ask for I-9s or proof of U.S. citizenship. If they find violations, they will give the owners a time period to comply or face fines. These inquiries and fines cause a disruption in business and unexpected costs. Manufacturers need to take a careful look at their employment rolls to avoid this turbulence.

The same can be said for trends in class action suits that target large groups of employees to pursue claims for unpaid overtime or unfair labor practices as outlined in the Fair Labor Standards Act. Employers, for example, that incentivize employees with bonuses based on production must also demonstrate compliance with any overtime owed to meet those production goals.

Manufacturers can receive incentives for hiring veterans or other special worker classes, but they must be careful when hiring these workers if reductions in force are required later. They don’t want to be perceived as manipulating the system, keeping employees only until requirements are satisfied.

On the benefits side, some larger manufacturers are setting up captive entities to self-insure the operation and/or employees — essentially paying premiums to their captive entity rather than to a third-party payer. If income is steady at $5 million to $6 million a year, a captive can provide another tool for owners as they plan for succession and retirement.

If you have any questions about how to add operational efficiencies, reduce taxes or plan for transfer of ownership in your manufacturing operation this year, talk to the manufacturing team at Cornwell Jackson.

GJ HeadshotGary Jackson, CPA, is the lead tax partner in the Cornwell Jackson’s business succession practice. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services to management teams and business leaders across North Texas.

 

Related Posts

Posted on Jan 18, 2016

manufacturing audit, R&D credit, icdisc, manufacturing tax credits, manufacturing dallas, manufacturing employment

In the past year, manufacturing employment in the Dallas/Fort Worth area has dropped by 2 percent. This statistic alone seems negative, but the overall outlook for manufacturing is trending positive with increased focus on innovation, simplified supply chains, diversification into customer-focused services and creativity with materials performance and fuel sourcing. It’s still a challenging industry, but this real or perceived lull in growth is the perfect time to assess the structure and vision of your company. Strengthen the basics to be ready for what’s next.

Oil drives Texas. It’s no surprise that the manufacturers we talk to are concernedManufacturing Outlook
about the drop in oil and gas prices. Many of them are tied to the industry as suppliers, fabricators and general contractors. Still, other manufacturers that are dependent on freight and shipping costs are more than happy to see fuel prices drop.

Then we have the valuation of the dollar against foreign currencies that affects trade. Manufacturers trying to compete against materials and products shipped cheaply from other countries must look for efficiencies besides price reduction. China’s economic slowdown does not seem to have helped the cause of U.S. based manufacturing, with weak performance reported around the world.

Although the Dallas/Fort Worth area outpaced many other states in overall economic growth in 2015, rather flat manufacturing performance did not help the cause. This fact was predictably offset by positive gains in hospitality, business and professional services, utilities and transportation, according to an economic update by the Federal Reserve Bank of Dallas.

Flat growth is not the final word. A pause in business is sometimes the perfect opportunity to review the vision, business model, processes and procedures, technology and other foundational contributors to growth. Let’s take a look at the current state of manufacturing and what manufacturers should focus on this year to prepare for the next wave of growth. If you clean house now and invest in the foundation of your business, you will be in a better position to seize opportunities when growth resumes.

Manufacturing Now

Manufacturing in developing countries continues to provide a path to rising incomes and living standards. In advanced economies, it is a source of innovation and competitive strength for exports and productivity. When the Recession hit the industry hard, employment fell with it, delaying the demand for skilled labor.

Well, the demand for labor isn’t necessarily back to the fever pitch of pre-Recession times simply because manufacturers have looked for ways to offset labor with equipment and automation. Manufacturers that have invested in automation since 2010 have survived and even thrived. They are crediting the investment — along with the trend in the Internet of Things (IoT) — to help them efficiently monitor inventory and productivity. Automation has also helped them anticipate and head off problems on the line or in the supply chain — reducing outages and downtime.

In fact, U.S. manufacturers may spend more than $5 billion on new robotic orders by the end of 2016, according to the Freedonia Group. In turn, the demand for labor has shifted to the types of employees who are skilled at both hardware and software. Manufacturers investing in IoT units to reduce maintenance costs and risk of outages will be ahead of their competitors as that industry ramps up in the next five years.

A strong base of defense and aerospace firms in Texas does support this move to what some are calling “advanced manufacturing.” Leaders are calling for the state to continue to create policies and make investments in higher education to support advanced manufacturing infrastructure.

An article in the December 2015 Dallas Business Journal also noted that Dialexa, a consulting firm for technology start-ups, planned to expand its hardware lab, which includes the company’s electrical engineering, embedded software, mechanical design, 3D printing and electrical assembly research and development. This is one example of a company working in emerging technologies that will incubate new types of manufacturing in the Dallas/Fort Worth region.

Manufacturing At Your Service

Another interesting shift in the industry is the expansion of services offered by manufacturers. Rather than strict product manufacturing, some industries employ half of their workforce in non-production roles. This includes R&D engineers, logistics staff and after-sales support and maintenance services. A report from the McKinsey Global Institute predicts that the role of manufacturing in advanced economies leans toward innovation, productivity and trade more than growth and employment. These advanced manufacturers also consume and provide more services than manufacturing facilities in developing countries.

A survey by Grant Thornton on technology trends found that the majority of more than 300 manufacturers surveyed in the U.S. believed that new technologies would bring new opportunities. The top five technologies cited were: robotics, advanced materials, IoT (sensors, interconnected machinery), 3D printing and big data (analytics).

The use of real-time data and analytics, for example, allows manufacturers to run more “what if” testing, according to the report. It can reduce risk and materials costs while improving quality and accelerating new product development.

What is holding back many manufacturers from taking the leap into all of these new technologies?  The biggest reason cited in the Grant Thornton report was economic uncertainty, followed by the perceived risks of adopting technology that isn’t completely proven.

Manufacturers are entrepreneurial, but when it comes to capital outlay they’ve learned to be cautious. Still, a move toward diversification seems to be a natural evolution. Manufacturing can now encompass proprietary customer designs, production and implementation and also after-care services. This diversification is already paying dividends for the job shops whose saavy owners realized the potential for value-added services. More services per customer leads to more loyalty and profit.

If you have any questions about how to add operational efficiencies, reduce taxes or plan for transfer of ownership in your manufacturing operation this year, talk to the manufacturing team at Cornwell Jackson.

GJ HeadshotGary Jackson, CPA, is the lead tax partner in the Cornwell Jackson’s business succession practice. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services to management teams and business leaders across North Texas.

Related Posts