Overlooked manufacturing tax credits
The last few years have been turbulent for Illinois manufacturers. With the rise of global competition and the cost of staying technologically competitive, the Illinois Manufacturers' Association reports that nearly 14,000 manufacturing jobs have been lost in Illinois in the last year alone. Manufacturers must strategically look for ways to lower costs and increase their bottom line.
Manufacturing focused tax credits and incentives are a great place to start for cost savings. Many tax credits and incentives for the manufacturing industry have only been improved with recent legislation. As we approach year end, there is no better time for manufacturers to begin exploring ways to capitalize on many under-claimed tax incentives.
The Research and Development Tax Credit (R&D)
The R&D Tax Credit, which provides an estimated $10 billion in annual tax savings for U.S. companies, is the largest tax credit for the manufacturing sector as a whole. However, despite its obvious benefit to companies, it is still widely under-claimed. This is likely due to the misinterpretation that "research and development" cannot apply to a company that isn't doing some type of lab or medical research. The definition however, is much broader and could apply to almost any type of manufacturer.
The most recent development to bolster the strength of the R&D credit was the passage of the PATH Act. The PATH Act made the R&D Tax Credit permanent. Further enhancements beginning in 2016 allow small business owners to utilize the credit against Alternative Minimum Tax (AMT), which limited many small business owners in the past. In addition, some startup businesses may be eligible to use the credit to offset their payroll tax liabilities which can be a huge benefit to those businesses who qualify.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is a tax credit granted to employers hiring employees who identify themselves among numerous designated classes. These groups include unemployed veterans, (TANF) recipients, (SNAP) recipients, and Supplemental Security Income (SSI) recipients, among others. The PATH Act recently enhanced this benefit and the credit has been renewed for 2016. The credit can be worth an average of $2,200 for new hires, but must be applied for through state workforce agencies in the first 28 days after the employee's start date.
Section 179 Deduction
Section 179 of the IRS tax code allows businesses to deduct the purchase price of qualifying equipment or software purchased during the tax year. For most small businesses the entire cost of the equipment/software purchased and placed in service any time before the end of the tax year can be written off up to $500,000.
Beginning in 2016, businesses can now take a section 179 deduction on the purchase of heating and air conditioning units. Additionally, qualified building improvements can be deducted, (formerly required to be subject to a lease).
As you can see, there are many ways to strategically save your business from large tax burdens and increase your bottom line. Please keep in mind that every tax situation is different and you should consult with your accountant or tax strategist to ensure that you are eligible for the deductions mentioned. Whatever strategies and best practices you choose to implement, keep in mind that annual tax planning and compliance will always benefit you in the long run.
• Jim Hamilton is partner with Weiss & Company LLP in Glenview.