MEDOWS CPA in Manhattan, New York provides tax and accounting help in New York . Manufacturing businesses have some specific federal tax issues that we would like to highlight and encourage you to discuss with us in person. It is easy in the daily rush of running a business to overlook or postpone reviewing tax laws that could, in some cases, generate savings. Contact our New York CPA office for assistance.

Manufacturing deduction.  An important tax benefit for manufacturers is the domestic production activities deduction (DPAD), also known as the manufacturing deduction. The deduction is equal to nine percent of the lesser of the taxable income or qualified production activities income (QPAI). The deduction is available if a business has income from the rental, sale or other disposition of tangible personal property, buildings (but not land), computer software, and other products. The products must have been manufactured, produced, grown or extracted primarily in the United States. The deduction is also available for income from certain services, such as engineering and architecture. The deduction is reported on Form 8903, Domestic Production Activities Deduction.

Depreciation.  Depreciation – the write-off of the cost of an asset – is an essential element of tax accounting for a business. Property is depreciable if it is used for business, has a useful life exceeding one year, and may wear out or lose value from natural causes. Property that appreciates in value can still be depreciated if they are subject to wear and tear. Depending on how much income is generated by the business, the general goal in taking depreciation is to be able to write off property over the shortest period available, based on the property’s useful life. Most property is depreciated under MACRS, the Modified Accelerated Cost Recovery System.  However, rather than claiming depreciation deductions, intangible property is amortized under Code Sec. 197. Taxpayers can also use cost segregation studies to reduce the period over which specified assets must be depreciated.

Special tax provisions provide accelerated write-offs of assets. These include bonus depreciation and the Code Sec. 179 expensing election. Depending on the current state of the law, companies claiming first year bonus depreciation may be able to write off 50 percent or more of an asset’s cost, in addition to the deduction allowed under MACRS depreciation. The expensing election allows a company to write off the entire cost of an asset up to the limit in the tax code. For 2013, the limit is a total of $500,000.  If Congress does not extend this provision, the limit will drop to $25,000 in 2014.

Accounting – repair regulations. To accelerate deductions and avoid having to depreciate asset costs over a period of years, companies may treat certain costs of maintaining its assets as repairs or maintenance, generally deductible in full in the year paid.  In late 2013, the IRS issued so-called “repair regulations” that explain when taxpayers must capitalize costs and when they can deduct expenses for acquiring, maintaining, repairing and replacing tangible property. The final regulations take effect in 2014, although taxpayers can elect to apply them to 2012 or 2013. The regulations have many provisions that enable taxpayers to deduct their costs more easily and that reduce the need to maintain depreciation schedules.  These provisions include the de minimis expensing rules, the write-off of expenses for materials and supplies, the deduction of recurring maintenance costs, and the replacement of building systems.

Accounting – inventories.  Taxpayers that produce merchandise and goods for sale are required to account for raw materials, supplies, work-in-progress and finished goods that comprise the items being manufactured. Taxpayers required to use inventories generally must use the accrual method of accounting. Accounting for inventories must reflect the best accounting practices of the taxpayer’s trade or business and must clearly reflect income. Permissible inventory accounting methods include FIFO (the first-in, first-out method); LIFE (last-in, first out) and average cost. Some taxpayers may also use the lower of cost or market (LCM) method.

Research credit.  Companies may claim the research tax credit for increased research expenditures in business-related activities.  The credit generally is equal to 20 percent of the increase in qualified research expenses over a base amount, although there is an alternative simplified credit (ASC). The research credit has been extended for one or two years at a time since the 1980s and currently applies through 2013. It is expected that Congress may simply extend the credit for another year, to avoid the high cost of making the credit permanent. The credit is not available for research activities conducted after the beginning of commercial production of a business component.  

Investment tax credit.  Companies are allowed to claim an investment tax credit (ITC) for particular expenditures. The ITC includes certain energy credits, the rehabilitation credit, and the therapeutic discovery project credit. In some cases, taxpayers can claim the credit for progress expenditures; otherwise, the credit may be claimed for the year that the property is placed in service. The taxpayer’s basis in the property must be reduced when the taxpayer claims the credit. A credit that is disallowed for the current year may be carried back one year and carried forward for 20 years.

We have highlighted only some of the many federal tax laws that impact manufacturing companies. Every business is unique and has particular tax considerations. Please contact our NYC CPA office so that we can set a time to discuss your business in more detail.