Supply chain interruptions, inflation, and tax difficulties are challenging for manufacturers. Even in a stable climate, uncertainty makes tax planning for manufacturers more complex, and the complications multiply exponentially when volatility and greater global risk are present. As another tax season with various filing obligations draws near, manufacturing companies must be aware of any potential tax savings opportunities resulting from the previous year’s operations. Although many tax planning situations are case-by-case, the following are some typical ones that might be relevant to the average manufacturing company:
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Deduction for Energy-Efficient Commercial Property
Manufacturing businesses that directly or indirectly own a recently built facility or have improved an existing structure are eligible for manufacturing property tax reduction. The new design or renovations must fall into one of the following three categories of energy-efficient products to qualify for the deduction:
- Construction of new building lights or energy-saving upgrades to existing ones
- Energy-efficient HVAC systems
- Building envelope: the creation or improvement of energy-efficient walls, floors, roofs, fenestrations, and doors.
The square footage of a new structure or upgrade is used to calculate the deduction. A tax expert dealing with manufacturing property tax reductions can help you understand how they apply to your property to maximize them.
Deduction for Qualified Business Income (QBI)
Pass-through entities (sole proprietorships, partnerships, or S-corporations) that generate qualified business income are generally eligible. The maximum deduction is 20% of the eligible business income. Whether the company is a trade or a specific service firm may limit the deduction amount. The deduction is also restricted if the person’s taxable income exceeds a certain threshold.
The three main factors determining the deduction are the business’s qualifying income, W-2 earnings, and the unadjusted basis of its qualified property. Before year-end, any of these things can be examined to see how best to maximize the deduction through wise tax preparation.
Tax on Pass-through Entities
Pass-through organizations (S Corporations or partnerships) have been able to deduct state taxes on their company revenue since the tax year 2021. The $10,000 individual state and local tax (SALT) deduction cap is currently in effect. The $10,000 limitation can be bypassed by paying the state taxes associated with the business income on the business tax return. In exchange, the owners get a credit on their personal state tax returns for their already paid taxes. Remember that not all states now participate, and each state may have slightly different rules.
Any qualifying property put into service during the tax year that costs more than $1.08 million is eligible for Section 179 treatment. Through 2022, 100% of qualified property was eligible for bonus depreciation. The deduction will diminish from 2023 to 2027 until it is no longer possible.
In December 2017, the CARES Act technically altered the Tax Reform. Qualified Improvement Property (QIP) is now a 15-year asset that qualifies for bonus depreciation. Commercial buildings’ QIP includes internal, non-structural upgrades added after the structures were first used.
Consulting a manufacturing tax expert is vital to identify potential tax reductions for your business.