Learn effective strategies to enhance your tax savings.
CLA’s Dylan Valentyn and Nick Romanelli sit with Mike Payne on the Buy the Numbers podcast to discuss key 2025 tax considerations for manufacturers, including depreciation schedules, R&D tax credits, and entity selection. They also cover the impact of recent tax legislation changes and strategies to enhance tax savings.
Listen to the conversation or read highlights from the transcript below.
What tax strategies should manufacturers consider when digitizing their facilities?
Many manufacturers are currently focused on digitizing and connecting their machines. This process requires significant infrastructure, including IT systems and cabling. These components can be pulled out of a 39-year depreciation schedule into a five- or seven-year recovery period if they are specific to the machines.
Can manufacturers claim R&D tax credits even if they are not a research lab?
Yes, manufacturers can claim R&D tax credits if they are dealing with the unknown in some way, such as creating new products, improving existing products, or developing new processes and prototypes. Proper documentation is essential to support these claims.
How should manufacturers track time and expenses for R&D tax credits?
Manufacturers can use an ERP system to track time and expenses for new jobs, including programming time, work holding, fixturing, and setup time. These costs may qualify for R&D tax credits if properly documented.
What are the requirements for claiming R&D tax credits?
To claim R&D tax credits, manufacturers must meet certain tests and have proper documentation. While a time tracking system is not required, it can be beneficial as evidence, and many manufacturers may find such evidence helpful when filling out the applicable updated tax form. Costs should be tracked based on calendars or estimates if a time tracking system is not available and should be done so contemporaneously.
As a manufacturer evolving your business, you discover improved methods and products for various market segments. This requires behind-the-scenes research to confidently launch new processes or products.
What is the economic risk consideration for contract manufacturers claiming R&D tax credits?
Contract manufacturers must consider which party has the economic risk. If the customer pays by the hour, the economic risk is likely on the customer. If the manufacturer is paid a fixed amount, the economic risk may be on the manufacturer.
How does the R&D tax credit work mechanically?
Once all information is captured, manufacturers should work with their CPA to document and report the qualified research expenses on the appropriate tax forms. The R&D tax credit provides a dollar-for-dollar reduction in tax liability.
Starting in 2022, research expenses under Section 174 must be capitalized and amortized over 5 or 15 years, depending on whether the research is done in the United States or overseas. This change can impact cash flow, but the R&D credit remains a permanent tax savings.
What is the biggest tax savings opportunity manufacturers often miss?
In addition to the R&D tax credit, an often overlooked savings opportunity is the Work Opportunity Tax Credit, which provides up to $9,600 per employee for hiring individuals from specific groups with barriers to employment.
What should manufacturers consider when selecting an entity structure for their business?
Manufacturers should consider tax rates, ownership structure, potential investors, and exit strategy when selecting an entity structure. There is no one-size-fits-all answer, and each situation should be evaluated individually.
What changes in tax legislation should manufacturers watch for in 2025?
Manufacturers should monitor potential changes in tax rates, the qualified business income deduction, and the estate and gift exemption. Legislation may impact these areas, and it’s important to stay informed to plan accordingly.
How CLA can help with tax planning
CLA offers a comprehensive range of tax planning services to help manufacturers make informed and strategic decisions. Our approach involves working with you year-round to develop an understanding of your organization and implement effective strategies to help you reduce tax liabilities and improve cash flow.
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