For leading Bay Area manufacturers, competition comes in all shapes and sizes, and from across the globe. Even in a market renowned for world-class innovation, competitive advantages are razor thin. Your success is driven by your ability to innovate and your innovation is dependent on many factors, not the least of which is your available capital.
Bay Area manufacturers are provided with many significant tax incentives that can help to mitigate tax liabilities, increase the bottom line and free up capital for ongoing investments.
Smart Business spoke with Linda Cook, senior tax manager at Sensiba San Filippo LLP, about opportunities for manufacturers that could fuel growth and profitability.
How can manufacturers leverage state and federal R&D tax credits?
Many manufacturers know that California and the federal government provide credits for conducting research and development.
What many don’t know is that federal and state tax codes define research and development much more broadly than most businesses. Far more qualifies for credits than just pure scientific research. Applied research such as new product development, process development and process improvement can also qualify for credits.
Unlike deductions, which lower taxable income, credits like the R&D credit actually provide dollar for dollar offsets to tax, making them extremely valuable.
What is the Domestic Production Activities Deduction (DPAD)?
The DPAD rewards qualified production activities with a deduction of up to 9 percent of net income, effectively reducing tax liability.
Like the tax definition of R&D, the definition of qualified production activities can go beyond traditional manufacturing to include software development, recordings and film production, and even the construction of real property. Understanding and applying these expanded definitions can lead to increased savings.
How can accelerated depreciation be helpful to manufacturers?
Depreciation deductions created by assets can actually lower tax bills and free up cash. Cost segregation allows for breaking large assets down into their component parts in order to speed up depreciation. A cost segregation study often produces significant catch up depreciation and a large break on upcoming tax filings.
Additionally, Section 179 and bonus depreciation can provide tremendous value at the time when qualifying assets are purchased and placed in service allowing for the immediate expensing of some assets and 50 percent bonus depreciation on others. While both Section 179 and bonus depreciation are currently expired, both appear to have a great chance of being extended.
What local, state and federal incentives should be considered?
Local, state and federal incentives are designed to attract businesses, reward expansion and job creation, and promote specific activities. Many manufacturers miss out on these opportunities because of the large number of incentives and the varying processes required to claim them.
At the federal level, the Empowerment Zone Employment Credit incentivizes hiring within designated areas while the Work Opportunity Tax Credit provides tax credits for hiring individuals within target groups. Both credits are currently expired, but they are likely to be renewed.
In California, three new incentives were recently introduced: a new sales tax exemption rewards targeted industries and activities; the California Competes program provides tax credits for businesses expanding or creating new jobs in the next five years; and the New Employment Credit provides credit opportunities for companies with net increases in jobs in designated areas.
When it comes to tax incentives, knowledge and action are the keys to opportunity. Identify the right opportunities and take the necessary steps to qualify or apply. Manufacturers should specifically discuss incentive opportunities with their tax adviser every year, matching opportunities with activities and proactively taking the steps necessary to realize savings. ●
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