With December 31 fast approaching, companies are examining every possible way to reduce tax liabilities. And managers are looking into their crystal balls to get a read on trends and economic indicators as they position their companies for success in 2010 and beyond.
Opportunities for tax savings have never been better. In fact, many manufacturers are minimizing tax liabilities by identifying depreciation and R&D tax credits as they continue their pursuit of lean initiatives.
Economic Stimulus Package Benefits Manufacturers
Two recent pieces of federal legislation have offered substantial benefits to manufacturers. The Economic Stimulus Act of 2008 not only helped consumers, but included special provisions for Section 179 of the tax code, including increasing limits on deductions for small- and medium-sized businesses.
And when Congress passed the American Recovery and Reinvestment Act (ARRA) of 2009 earlier this year to stimulate economic growth, it provided several tax incentives for businesses, too. For example, it extended some Section 179 benefits from the 2008 legislation into this calendar year, raising the ceiling on the amount of equipment that could be deducted to $800,000 from $500,000 -- as well as other benefits.
Additionally, during 2009, small businesses are eligible to expense up to $250,000 of the cost of qualifying property. Phase out of credit begins at $800,000 of qualified purchases and is completely phased out at $1,050,000.
How can small- and medium-sized companies realize those savings? In consultation with your accountant and tax advisor, consider these options:
50% Special/Bonus Depreciation -- The 50% special depreciation allowance available in 2008 is extended to 2009 for applicable property. In other words, companies can deduct half the adjusted basis of the property if it was bought (or leased) and placed into service in 2009.
Examples of property that typically qualify include: equipment, business vehicles (gross vehicle weight of more than 6,000 lbs., computers and software, office furniture and equipment. Some property that is used for business and personal use might also be eligible. Check with your accountant about deductions extended through 2010 for specific property.
S-Corporation Built-in Gains Holding Period -- For 2009 or 2010 tax years, the corporate level tax on the built-in gains is eliminated for an S-Corporation that converted from a C-Corporation, if that conversion was at least seven years before the current tax year.
Capture R&D Tax Credits
Along with federal legislation aimed to stimulate the economy and benefit businesses, additional federal and state research and development tax credit programs may yield additional savings. Specifically, the R&D tax credit offers cash incentives for companies that conduct R&D in the U.S. More than $5 billion in federal R&D tax credits are disbursed annually.
Recent regulations broaden the type of industries that qualify for the tax credit, which is designed to encourage research and foster collaboration among companies to stimulate economic growth. If a company designs, develops or enhances a product or a process, it may be eligible. And finally, qualifying companies that did not claim a previous credit can "look back" to the three previous years plus the current year -- and realize the credit.
Lean Yields Results; Positions for Success
But identifying strategies to minimize tax liabilities is just one way of managing overall costs. Smart companies actually have leveraged this difficult economic period to focus on getting lean -- and leaner -- as they introduce additional process improvements. Clearly, lean has revolutionized manufacturing. A case in point: once upon a time, companies could deliver on two of the following criteria: quality, speed and price. Producing a great quality product -- fast -- could demand a price premium. In today's economic environment, companies that don't meet all three criteria -- quality, speed and price -- will fail.
Another example of the power of lean involves a precision metals company whose owner earned a Black Belt Certification in Lean Manufacturing. Even in the current economy, the company continues to grow, delivers value to customers and realizes significant profitability. At this manufacturer, every thing has a purpose and employees make improvements each and every day.
While economic conditions continue to be challenging, companies that have reinvented or transformed their businesses and minimized current and future tax liabilities are on the right track to maximize their potential in the new year.
Derek Adamczyk, CPA is a Senior Accountant for Porte Brown, a mid-sized, full-service accounting and technology solutions firm. http://www.portebrown.com/