Who's Your Buddy?
This list spells out several 2019 year-end tax planning ideas for manufacturing and distribution companies to consider
Bonus Depreciation. 100% bonus depreciation is available for both new and used machinery and equipment placed in service in 2019. Final regulations were issued this year which may address some unusual situations for bonus depreciation. Still uncertainty with QIP (“Qualified Improvement Property”) and bonus depreciation.
UNICAP. Two items with UNICAP for 2019. First, for small companies (with average gross receipts under $25,000,000) they can change accounting methods and not be subject to UNICAP and write-off prior adjustments. For large companies, there were final UNICAP regulations issued late last year that apply for 2019, and these should be addressed for 2019 to see if any UNICAP changes need to be made and/or if any opportunities exist.
Directive on R & D Tax Credit. The R & D tax credit is available for many manufacturers as they constantly seek to develop new and innovative products and improve their production processes. The R & D credit can help provide a tax incentive for companies engaged in R & D activities. These credits, however, have been the focus of increased scrutiny recently by the taxing authorities, so companies should be aware of this. One possible idea to consider is an IRS Directive issued in late 2017 which could provide a safe harbor for R & D costs based on what the company does for book purposes with its R & D costs.
Disallowed Deductions. The recent Tax Cuts and Jobs Act (TCJA) offered lower tax rates and many tax incentives. But it also disallowed certain deductions for businesses including: new complexities rules that could result in less business interest expense being deductible by a company; a cut back on meals and entertainment; and even curbing employee parking expenses.
Year 2019. For 2019, many companies will adopt a new FASB accounting standard on revenue recognition (“ASC 606”). This change in book income may have an impact on a company’s tax situation and could trigger additional income for tax purposes as well. A Form 3115 (or several of these) will likely be required for companies in 2019. Each situation is different, and we can assist in the process.
Tax Rate. The TCJA cut the corporate tax rate to 21%, and also dropped the new tax rate to pass-through businesses to ~ 30% or less, but brought about some complicated new provisions. We can assist in analyzing these new rules with clients and prospects to see if you are entitled to the new 20% Qualified Business Income (“QBI”) deduction, or perhaps whether the company should evaluate C Corporation status.
Historic Absorption Ratio (“HAR,” yes – finding an “H” was tricky). Tied in with UNICAP above is a method entitled the “Historic Absorption Ratio. This method allows a manufacturer or distributer to analyze its UNICAP costs over the prior few years and possibly be able to make a HAR election to apply a percentage based on the prior years average and avoid making detailed UNICAP calculations every year.
Expensing Election. In addition to the 100% bonus depreciation noted above, there is a higher Section 179 expensing election available for 2019. The threshold has been increased to $1,020,000 and the point at which qualify purchases is phased out at $2,550,000. Something for manufacturers and distributors to keep in mind for 2019 CapEx additions.
Expensing small asset purchases. Besides the 100% bonus depreciation and Section 179 noted above, many manufacturers and distributors but needs to establish guidelines with how they handle small purchases. These can be directly expensed if set rules are followed for both book and tax purposes by the business. But, in some cases, it may be more beneficial from a tax standpoint to not directly expense these items and instead capitalize and depreciate these assets using bonus depreciation. This may provide some other tax savings for a company, and we can help with this analysis.
LIFO Inventory. LIFO inventory should be evaluated for any manufacturer or distributor that is encountering rising prices. Inflation has picked up in several industries and markets in recent years in part due to tariffs or the threat of tariffs. LIFO is still available and is most beneficial when a company is experiencing inflation in its inventory. The higher the inflation, the higher the LIFO tax savings. There are many considerations with LIFO, and we can help in this analysis, but the savings may be worth the extra effort.
FDII (pronounced “Fiddy”). There is a new incentive from TCJA for companies that export their goods. It can cut the net tax rate on companies that export their products and in a C Corporation situation, the tax rate could drop from the low 21% to an even lower 13%. We can assist in evaluating whether the FDII incentive is available and practical in your situation.