The new provisions for 2018 have changed a multitude of tax deductions, exemptions, rates and brackets. Now that the fanfare around the ‘first tax reform in 30 years’ has settled down, have you taken the time to perform a tax checkup and evaluate what it means for your business?
“We’ve seen tax savings working with our food and beverage manufacturing clients that have resulted in opportunities ranging from $400K to $3M depending on structure and size of operations. If you’re not taking advantage of this year’s tax changes, you’re likely losing money,” says Christy Norton, partner and Food & Beverage team lead at K·Coe Isom.
If you haven’t considered the impact that the new tax act provides, or acted upon positioning your business for tax opportunities or obstacles, a midyear tax checkup is the perfect time to do so.
Top 5 Ways Manufacturers Can Produce Tax Savings
A simple way to reduce your taxes is to take advantage of opportunities. The Tax Cuts and Job Act of 2017 is rife with opportunities for manufacturers and processors. Now is the perfect time to see how the new tax laws could impact your business next year when you file 2018 taxes.
Here are the key areas manufacturers and processors should evaluate to seize maximum tax benefits:
- Qualified Business Income (QBI) Deduction – 20% under IRC Section 199A. The QBI deduction has the potential to provide significant tax breaks for many business owners.
Trusts and estates qualify for a new 20 percent deduction under IRC Section 199A if they have business income from a pass-through business entity (sole proprietorship, partnership, limited liability company, or S corporation), and the thresholds that apply to non-married taxpayers also apply to trusts and estates.
- C Corporation – 21% Flat Tax Rate. If you’re not currently a C corporation, there may be advantages to having all, or a portion of, your business transition to a C corp. Under the new tax law, there are reasons to reconsider the income, activities and strategy related to a C corporation.
The taxable income (after deductions for salary, business expenses, and depreciation on furniture and equipment) is taxable to the Corporation. The Corporation would only be taxed on income “effectively connected with the United States.” The flat 21% corporate tax rate then applies to the taxable income of the Corporation regardless of its activity. The flat-tax provision for C corporations does NOT sunset – it’s permanent.
Read more on C corp conversion advantages here: https://www.pinionglobal.com/for-s-corps-does-a-c-corp-conversion-make-sense/
- Availability of Cash Method, Inventory Capitalization Changes (although these are limited for companies with sales less than $25 Million). C Corporations and businesses with inventories are among the types of businesses that will benefit from the increased $25 million revenue threshold.
If qualifications are met, a business can either treat inventories as non-incidental materials and supplies or conform to the taxpayer’s financial accounting treatment of inventories. In addition, businesses that were previously required to capitalize certain costs as part of inventory (Section 263A) also are exempted from this provision if they meet the new $25 million revenue test.
- Depreciation (100% Bonus Depreciation, increased Section 179 deduction limits) and Like-kind Exchanges (IRC 1031). Section 179 depreciation is now $1,000,000 and the bonus depreciation is now 100 percent. Equipment purchase limits have been increased to $2.5 million.
Most types of business equipment, including software and technology, qualify for Section 179 depreciation.
Like-kind exchanges are limited to exchanges of real property that is not primarily held for sale (this limits the types of property manufacturers could consider as part of a like-kind exchange). For example, in 2017 businesses could trade in equipment and defer the gain, whereas now they must recognize the gain in the year of the trade; however, with bonus depreciation for the newly acquired equipment, there will actually be more deductions than in 2017.
- Business Interest Expense Limitations (applies if sales are over $25 million). The maximum amount of net business interest deductible under the new rule will be 30 percent of adjusted taxable income. Taxpayers generally may carry forward any unused business interest expense indefinitely.
Applying the new limitations on interest deductions may result in unfavorable tax liabilities and will require creative tax planning. An unsuccessful revenue year could mean more tax liability by reducing the amount of interest your business can deduct that year.
Manufacturers will need to reassess both strategy and “total” tax liability across the entirety of the business this year, and address areas that are generating the largest tax costs.
K·Coe Isom’s tax advisors are adept at navigating the new tax code and its effects on a company’s total tax liability and strategy. Contact our manufacturing-specialized tax strategists to perform a tax checkup and map out how to maximize your most advantageous tax structure.