What’s In? What’s Out? Planning for 2014
The tax season may have come and gone, but that doesn’t mean owners of manufacturing and distribution companies should put tax planning on the back burner until next spring. Smart owners work closely with their CPAs to make tax planning a year-round initiative.
With this in mind, here’s an update on some programs, incentives, deductions and credits that may impact your tax planning in 2014:
- Repair regulations in effect. New IRS regulations relative to tangible property went into effect on January 1, 2014. These new rules involve the capitalization of costs incurred in buying, maintaining and improving tangible property both owned and leased such as equipment, buildings, materials and supplies.
Virtually all manufacturers and distributors will be affected by these complex rules. To comply with the new regulations, you will likely need to file a Form 3115, Application for Change in Accounting Method. This may require a Section 481(a) adjustment over the next four years.
- Section 179 restored to original limits. For the last few years, the Section 179 deduction allowed businesses to deduct the full purchase price of qualified financed or leased equipment all the way up to $250,000. For 2014, the Section 179 deduction amount reverts back to its original limit of $25,000, plus an adjustment for inflation. Also, the 50 percent bonus depreciation on new equipment is no longer available.
- R&D credit expired again. The R&D tax credit expired in December. However, it has expired numerous times before and has always been renewed, so it may be renewed again retroactively later this year.
The R&D tax credit is designed to promote innovation by offering a tax reduction for qualified expenses incurred in the development of new and improved processes, formulas, techniques and products. These expenses include wages, supply costs and 65 percent of contract labor costs.
The tax credit includes four distinct requirements that must be met. Qualifying isn’t difficult, but applying for the credit if it’s renewed will involve a fair amount of paperwork.
- A LIFO conversion maybe? For manufacturers with significant amounts of raw materials, work-in-progress and finished goods on hand, a conversion to the last-in-first-out (LIFO) method of inventory accounting might be beneficial. In periods of rising costs, LIFO decreases the value of ending inventory when compared to the first-in-first-out (FIFO) method. Lower ending inventory value results in higher cost of goods sold, which in turn lowers taxable income.
A simple way to estimate the value of converting to LIFO is to multiply inventory by anticipated inflation by the tax rate. For example, a taxpayer with $5 million of inventory in a 2 percent inflationary environment and paying a 40 percent tax rate would benefit by approximately $40,000.
- Think IC-DISC. If your company exports its products either directly or indirectly an Interest Charge-Domestic International Sales Corporation (or IC-DISC) may be worthwhile. An IC-DISC is a tax-exempt domestic corporation typically owned by the individual shareholders of the exporting company.
The exporting company pays the IC-DISC a commission on its exports either 50 percent of export net income or 4 percent of qualified export gross receipts and deducts this amount from ordinary income. When the IC-DISC pays dividends, the shareholders pay only the dividend income tax rate on those funds, with the net effect of up to a 20 percent tax savings on IC-DISC income.
Note that the IC-DISC must be established before the export sales income is earned.
- Consider cost segregation. Buildings are depreciated under the straight-line method over 39 years. However, a building typically consists of equipment and fixtures that are depreciated under an accelerated method over three, five, seven or 15 years.
A cost segregation study examines the building to determine which parts of it might qualify for accelerated depreciation. If your company recently moved into a new building, consider hiring a specialist to conduct a cost segregation study to maximize your depreciation opportunities.
Stay in touch with your tax advisor to be sure you’re taking advantage of tax planning opportunities throughout the year.
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