The U.S. isn’t a low wage nation. We have to make things and serve people better, smarter, faster and with more skill. Therefore, business owners are always working to improve their offering for customers. What equipment or methodology will technologically put you ahead of the curve?
The good news is that a few helpful tax credits have been made permanent or extended out several years, says Floyd Trouten, tax partner at BDO USA, LLP. Now, you won’t have to wait until the end of the year to plan your investments, worrying whether or not you can get the credit.
“That’s a heck of a way to run your business, especially with long-term investments that can costs hundreds of thousands of dollars,” Trouten says.
Smart Business spoke with Trouten about long-range planning and investment, as well as tax provisions that help offset these costs.
Why do U.S. manufacturers, distributors and service providers need to invest in themselves?
The U.S. dollar is high against a lot of currency right now, so it costs more to buy our finished goods. We have to ensure that we’re more efficient — better and faster — to stay attractive. At the same time, foreign companies can sell their goods cheaper because a dollar buys more finished product in the European Union or South America.
As another example, China now faces dumping duties on coiled steel. As a result, they’ll probably send more completed parts, which won’t have duties. Before, the Chinese might ship the steel and your company would convert and sell it to the user. Now, the Chinese are going to say, ‘OK, I’ll just make the part and sell it to the direct user.’
Having state-of-the-art equipment and the ability to find niches with expanded offerings is critical in today’s market.
What do companies need to know about the R&D tax credit?
The R&D credit for growing research and development has been made permanent, after 14 separate extensions. Employers can better plan and take more risk because the government is venturing with them.
The R&D credit applies to more than just product improvements or testing. It can be used for sales, general and administrative costs, as long as it’s continual improvement.
There are two calculation methods. The simplified method requires three years of data for a 14 percent credit. The full credit is 20 percent and requires five years of data. If you’ve incurred time from your engineers, line employees and management on a new product, you can do an R&D study to ensure you’re picking up all costs, in order to maximize the credit.
Also, if you’re a small company, typically $5 million in revenue or less, you have the option to use up to $250,000 of the credit to offset what you pay in Social Security and Medicare taxes.
How has bonus depreciation and Section 179 changed?
With bonus depreciation, in the initial year of service you can write off 50 percent of an asset. The bonus now extends through 2019. Employers will get 50 percent through 2017, and then it goes down to 40 percent in 2018 and 30 percent in 2019. This is particularly useful for employers with capital-intensive equipment needs.
A subset of this, Section 179 allows a company to expense up to $500,000 in the initial service year, as long as it’s not putting in more than $2 million in fixed assets. This has been made permanent and it will adjust for inflation. Also, companies can now expense off-the-shelf software under Section 179, rather than amortize it.
So, if you buy equipment, you could get a tax deduction, whether it’s 50 percent bonus depreciation or Section 179 immediately, even though you’re still paying the bank and the asset will benefit you for years to come.
Are there other tax credits that might apply?
There are additional credits, but one to consider is the Work Opportunity Tax Credit (WOTC). The WOTC or other similar programs, found on federal, state and local levels, are designed to help those who face barriers to employment, such as veterans, disabled, people on government assistance, etc. There’s a lot of paperwork and detail that you need to pay attention to, but it is something to think about if you have a talent shortage, whether you’re a manufacturer or restaurateur.
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