5 Tax Considerations and Incentives Manufacturing Companies Should Leverage

Tax planning is a critical aspect of financial management for manufacturing companies. The sector’s capital-intensive nature and the complexity of its supply chains make it prime for incentives and considerations. The manufacturing industry is also one of the most heavily regulated. Numerous federal, state, and local tax incentives exist to stimulate growth, innovation, and job creation.

However, navigating the intricate landscape of tax regulations can be challenging. Many manufacturing businesses miss out on valuable tax credits and deductions. In this blog, we’ll explore five key tax considerations and incentives that manufacturing companies should leverage. This should help optimize their tax strategy and boost their bottom line.

1. R&D Tax Credits for Manufacturing Companies

The Research and Development (R&D) Tax Credit is one of the most significant incentives available to manufacturing companies. This credit encourages businesses to invest in innovation by offering a dollar-for-dollar reduction in tax liability. As long as they have qualified research expenditures, the credit should help the companies save money. For manufacturing companies, R&D activities can include any number of situations, including:

• developing new products
• improving existing products
• enhancing manufacturing processes
• creating prototypes
• conducting trial production runs

The activities must meet specific criteria to qualify for the R&D Tax Credit. These may include experimentation and eliminating technical uncertainty. Manufacturing companies should carefully document their R&D activities, including the costs associated with labor, supplies, and contracted services. Additionally, the R&D Tax Credit can be claimed at both the federal and state levels, further enhancing its value.

Given the capital-intensive nature of manufacturing, the R&D Tax Credit can provide substantial savings. This allows companies to reinvest in innovation and maintain a competitive edge in the market. It’s crucial for manufacturing companies to work with a tax advisor who understands the nuances of the R&D Tax Credit to ensure they are maximizing their benefit.

2. State and Local Tax Considerations

In addition to federal tax incentives, manufacturing companies should also be aware of state and local tax considerations. These tax incentives can significantly impact their tax liability, especially for their industry. Many states offer tax credits and incentives specifically designed to support the manufacturing sector. Massachusetts is a prime example with several beneficial programs.

One such program is the Massachusetts Apprenticeship Tax Credit (TIR 18-13). This program offers a credit to manufacturing companies that employ apprentices in certain trades. This credit is equal to up to $4,800 per apprentice per year. It can also be applied against the company’s income tax liability. Manufacturing companies benefit from the tax credit by participating in the apprenticeship program. It also lets them access a skilled workforce trained specifically for their needs.

Another valuable tax incentive in Massachusetts is the Investment Tax Credit (ITC). This allows manufacturing companies to claim a credit against the cost of qualifying tangible property. This can be either machinery or equipment used in manufacturing. This credit can be a significant boon for companies expanding or upgrading their operations. It can effectively reduce the cost of capital investments.

Manufacturing companies should carefully evaluate their region’s state and local tax credits and incentives. Consider how you can integrate these programs into your overall tax strategy. Companies can reduce their tax burden and increase their financial flexibility by taking full advantage of these opportunities.

3. Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit (WOTC) is a federal tax incentive available to employers for hiring individuals from specific target groups who face significant barriers to employment. For manufacturing companies, the WOTC can be a valuable tool for reducing tax liability. It is also a powerful commitment that contributes to promoting a workforce culture of diversity, equity and inclusion.

Eligible employees under the WOTC include:

• veterans
• long-term unemployed individuals
• ex-felons
• individuals receiving certain types of public assistance

The credit amount varies depending on the employee’s target group, wages earned, and hours worked. Manufacturing companies often require a large and diverse workforce, making the WOTC particularly relevant. It’s important to note that the WOTC is a temporary tax credit. Employers must apply for and receive certification for eligible employees through their state workforce agency.

Incorporating the WOTC into a company’s hiring strategy can lead to significant tax savings and contribute to the business’s overall success. Manufacturing companies should work with their HR department and tax advisors to maximize their use of the WOTC and other related incentives.

4. ESG Related Tax Credits

Environmental, Social, and Governance (ESG) considerations have become increasingly important in business. Manufacturing companies find that they can align their tax strategy with their sustainability goals. They can do so through various ESG-related tax credits, encouraging businesses to adopt environmentally friendly practices.

One prominent ESG-related tax credit is the federal Investment Tax Credit (ITC) for solar energy. This allows companies to claim a credit of up to 30% of the cost of installing solar energy systems. For manufacturing companies, investing in renewable energy provides a significant tax benefit, reduces energy costs, and enhances the company’s reputation as a socially responsible business.

Additionally, some states offer tax credits for companies that invest in energy-efficient equipment or adopt sustainable practices. For example, Massachusetts offers the Energy Storage Initiative, which provides financial incentives for companies that invest in energy storage technologies. These incentives can be particularly beneficial for manufacturing companies that consume large amounts of energy and are looking to reduce their operational costs.

Furthermore, by leveraging ESG-related tax credits, manufacturing companies can achieve the dual benefit of reducing tax liability while advancing their sustainability initiatives. This approach enhances the company’s financial performance and strengthens its commitment to corporate social responsibility.

5. Global Intangible Low-Taxed Income (GILTI)

Global Intangible Low-Taxed Income (GILTI) is a provision introduced by the Tax Cuts and Jobs Act (TCJA) that impacts U.S. companies with foreign subsidiaries. For manufacturing companies with global operations, GILTI is an important consideration, as it subjects a portion of a company’s foreign income to U.S. taxation, regardless of whether that income is repatriated.

GILTI is calculated based on a formula that considers the company’s foreign income and the tangible assets held by its foreign subsidiaries. The income that exceeds a 10% return on those assets is considered GILTI and is subject to U.S. tax at a reduced rate. However, manufacturing companies can offset their GILTI liability by claiming a 50% deduction and foreign tax credits, which can significantly reduce the impact of GILTI on their overall tax liability.

For manufacturing companies with significant international operations, developing a comprehensive GILTI strategy is crucial to minimize the tax burden. This may also involve restructuring operations, adjusting transfer pricing policies, or maximizing the use of foreign tax credits. Working with a tax advisor specializing in international tax is also essential to navigate the complexities of GILTI and ensure compliance with U.S. tax regulations.

Make The Most Out of These Tax Considerations for Manufacturing Companies

Tax incentives and credits offer a significant opportunity for manufacturing companies to enhance their financial health and competitiveness. By strategically leveraging these benefits, businesses can reduce their tax liabilities, reinvest savings into innovation, and improve operational efficiency. These advantages not only boost the bottom line but also allow companies to maintain a competitive edge in the rapidly evolving marketplace.

However, navigating the complexities of these tax incentives requires specialized knowledge and careful planning. This is where working with a tax advisor becomes invaluable. At Tonneson + Co, our experienced tax professionals understand the unique challenges and opportunities within the manufacturing sector. We can help you identify the most relevant tax credits and deductions for your business and develop a comprehensive tax strategy that aligns with your goals.

Partnering with Tonneson + Co means having a dedicated team that stays up-to-date with the latest tax changes and regulations, ensuring that your business maximizes every available opportunity. Let us help you transform these tax incentives into substantial financial benefits. Contact us today to learn more about how we can support your manufacturing company in achieving growth and profitability through effective tax planning.