Guest Post – Range of Tax Issues for Manufacturers

I have a guest blog here from Whirlwind Steel.  It lays out various state, federal and international tax matters for manufacturers. The timing is good as we are likely to soon see a tax reform bill (11/1/17 perhaps). What issues will remain, what might disappear, and what new issues might arise? Let’s start with Steve’s overview of taxation for manufacturers.

Range of Tax Issues for Manufacturers

By Steve Wright of Whirlwind Steel*

Taxes. Just the word can make manufacturers shudder. Trying to navigate the US tax rules makes your brain hurt. However, since taxes are a necessary evil, we put together a list of common tax issues manufacturers face and a few tips to help you through the jungle of tax regulations.

Tax time doesn’t just roll around; it jumps right out at you. Let's see about making it a little less stressful.

The Rapidly Changing State Tax Nexus

Businesses are putting more resources into sales tax compliance as the rules change and become less transparent. One of the biggest issues facing companies is the definition of a state tax nexus. Nexus complicates multi-state taxation for sellers and faces increasing legislation, litigation, and regulatory activity.

• Nexus is defined as the threshold of activity a company must have with a state before a tax liability is imposed, requiring compliance responsibility.
• The concept is not completely settled and differs from state to state.
• States are facing a great deal of fiscal pressure and are casting about for more sources of revenue making nexus a target for constant change.
• Not only is the requirement to file ambiguous, but other nexus problems can also impact the amount of total state income and franchise tax due; for example, whether you have the right to apportion or disregard sales from your sales tax factor.

With nexus defined and treated differently in each state, the burden of compliance grows exponentially with each state in which a company does business. There is a potential for a company to create a nexus in a state merely by selling to people there.

Confusion over Incentives, Credits, and Deductions

Federal, state, and local governments offer a variety of incentives, deductions, and tax credits, which are designed to encourage certain types of activity that impacts the economy, environment, or another sector. In some cases, the deductions, incentives, and credits are temporary, lasting until a certain tax year and then disappearing. Manufacturers may not have taken advantage due to confusion about eligibility or qualification.

One tax credit that is highly beneficial for manufacturers is the R&D tax credit. 

• This credit became a permanent part of the tax code in 2015.
• It is a mechanism for capturing the costs of R&D activity to provide a credit on taxes for R&D activity.
• Small businesses may be able to use this credit in place of the alternative minimum tax (AMT).
• Several new projects and investments qualify you for this incentive, reducing risk and costs.

Other opportunities to reduce taxes include the following:

·       Work Opportunity Tax Credit (WOTC) - reduces an employer’s tax liability up to a certain limit for each new hire from a qualified group such as veterans and people in the SNAP program. The credit is available through 2019.

·       S-Corporation Tax Adjustment - if your business is organized as an S-corporation you can take advantage of a stock basis adjustment for charitable contributions of property and exemption from corporate tax on built-in gains assets.

·       Capital Expenditure Expensing - Small businesses and some 39-year property qualify for the 15-year recovery under the federal PATH Act and bonus depreciation.

Business tax advisers and tax attorneys keep up with these changes and have the experience to determine whether or not a manufacturer qualifies.

International Taxes: Section 987, BEPS, and CbCR

Running a global manufacturing company becomes even more complicated, tax-wise, when dealing with a foreign country.

• Section 987 Regulations - governs the recognition of exchange gain and loss for US remittances for multinational companies with disregarded or flow-through entities and use something other than US dollars for currency. The adoption deadline is 2018 for these regulations.
• Base Erosion and Profit Shifting (BEPS) - world governments seek to ensure all companies pay tax on revenue in the country in which it was created. Not all countries will implement BEPS, but many have or will. For manufacturers, the chief concern is that BEPS will change the commissionaire structures.
• Country by Country Reporting (CbCR) - the US federal government issued final regulations that require some US taxpayers that are the ultimate parent [Deloitte newsletter] of a multinational enterprise group to begin CbCR. The filing requirement applies to businesses with $850 million or more in global group revenues.

Multinational manufacturers will need to invest more in compliance with international taxes as changes come fast and furious from governments starved for revenues.

See a February 2017 RSM newsletter on tax and manufacturing for more details of some of these items.

Tips for Tax Time

• Analyze how your tax accounting method for income and expenses affects your tax planning. Most manufacturers use either income deferral or expense acceleration.

•  Did you know that fringe benefits are taxable because they are forms of pay for the performance of services? The provider of the service does not have to be an employee. Fringe benefits are also subject to numerous exclusion rules.

•  The value of your inventory is a significant factor in taxable income. Match the method you use to value inventory to your type of business. Common methods include the Cost Method, Lower of Cost or Market Method, and UNICAP (Uniform Capitalization Rules).

• You may be liable for both manufacturer excise taxes and the federal highway vehicle use tax. To counter this liability, check your eligibility for an income tax credit or refund for gasoline, diesel fuel, or kerosene used for nontaxable activities.

Paying taxes is a requirement for operating a manufacturing business. Tax regulations change often and require near-constant monitoring to ensure you remain compliant, another regulatory burden you, as a business, must shoulder. However, if you and your tax adviser or attorney pay close attention, you may be able to counter some of your tax liability with available incentives, credits, and deductions.

If you are multinational, you will need to invest in services to help you keep up with international tax law and its impact on your US taxes. The IRS website contains valuable resources to help you navigate through the thicket of regulations while an experienced tax attorney can help you determine the best method of valuing your inventory, tracking excise taxes, and file timely returns.

All manufacturers are in the same tax boat. Consider the tips we offer and take advantage of every possible resource to help you comply yet remain a profitable business.

*Whirlwind Steel designs and manufactures Sturdi-Storage metal self-storage buildings.