Those in the manufacturing industry bring vital products and jobs to Connecticut. Most were hit hard by the pandemic as well. As you start thinking about your 2021 taxes, don’t miss out on a variety of tax incentives available to manufacturers. While you may not qualify for all of them, it is well worth your time to understand what is available so you can get as much tax relief as possible.
Research & Development (R&D) Tax Credits
Available since 1981, any business that designs, develops, or improves a product or process can use the R&D credit to reduce their tax liability. It is calculated based on wages, materials, and subcontractor costs, and can either be deducted in the year in which the expenses are incurred or deferred and amortized over a minimum of five years. 2021 is the last year you will have the option to take the full credit in the year it was incurred, so it is important to talk to your tax advisor about the best way to use it for your specific situation.
100% Depreciation Deduction
The 2017 Tax Cuts & Jobs Act (TCJA) created a variety of new or expanded deduction opportunities, one of which is the opportunity to depreciate business assets whose recovery period is 20 years or less. This covers business expenses including computers, machinery, equipment, and even appliances and furniture, in most cases. You can deduct these expenses in the year you placed them into service up to $1.05 million for 2021 subject to certain phase out thresholds. However, for manufacturers there are other important state tax considerations such as deciding between Section 179 deduction or Bonus Depreciation, which are treated differently at the state levels.
Cash Method for Tax
If your manufacturing company’s revenue is less than $26 million (using a three-year average), you can elect to use the cash method for tax purposes which matches the tax to when the income is received, and expenses are paid. You must also capitalize materials and expense labor and overhead related to inventory. This can create a huge deduction in the year the change is made and allows you to defer income as your company grows. It is not a good idea for all manufacturers, so it needs to be weighed carefully.
Incentives for Exporters
To get more US products in the global market, the IRS offers incentives to those that export some types of products by forming an Interest Charge Domestic International Sales Corporation (IC-DISC). This allows the company to convert ordinary income to qualified dividend income and defer income on qualifying export sales. This then creates a way for manufacturers to lower their prices and more easily compete in a global market.
Qualified Business (QBI) Income Deduction
The owners of manufacturers that operate as S corporations, partnerships, or sole proprietorships (not C corporations) can deduct 20% of the companies taxable operating income, limited to 50% of wages or 25% of wages and 2.5% of qualified property.
Employee Retention Credit (ERC)
If your company had a significant decline in sales, or was affected by government shutdown orders in 2020 or 2021, you may qualify for this credit. This refundable credit is based on employee’s wages, plus health insurance and can be a significant amount of money for small businesses. This credit ended on September 30, 2021 but there is still plenty of time to claim it.
Connecticut Manufacturing Tax incentives
- Manufacturing and Biotech Sales & Use Tax Exemption: Connecticut offers sales & use tax exemptions for investments advanced manufacturing and bioscience companies make to create jobs and modernize operations. This 100% sales tax exemption may be available for:
- Purchases of machinery used directly in the manufacturing process, as well as materials, tools and fuel used to fabricate finished products
- Sale and the storage, use or other consumption of machinery, equipment, tools, materials, supplies, and fuel in the biotech industry
- Manufacturing Machinery and Equipment Tax Exemption: Connecticut exempts certain investments in advanced equipment and machinery that is acquired and installed in a manufacturing or biotechnology facility from property tax for five years.
There are other options to consider as well to these outlined above. We have years of experience serving manufacturing and distribution companies in Connecticut and would be happy to talk to you about what you qualify for, and how it plays into your big tax picture for 2021 and years to come. Reach out with questions or if we can help in any way.