Many U.S. manufacturers are leaving money on the table — some of it significant — by not optimizing the provisions of the Republican tax-reform act of 2017, a leading corporate-tax expert told attendees at the Chief Executive Smart Manufacturing Summit.
“Manufacturers are the biggest winners from the tax cut,” said Ian Boccaccio, principal and global income tax practice leader at Ryan LLC, which was a sponsor of the event in Dallas. But he said many manufacturers aren’t taking as much advantage of the new law’s provisions as they could.
The victories for manufacturers in tax reform included reduced corporate-tax rates, reduced pass-through rates, export incentives and enhancement of research-and-development tax credits, among others, Boccaccio told attendees.
Boccaccio said that the new law reduces the cost of capital for manufacturers through immediate tax deduction of investments and equipment, including 100-percent deductibility generally for the cost of new equipment with an expected life of less than 20 years, which includes most non-real-estate property.
To optimize tax efficiency, he said, manufacturers should perform an accounting-methods analysis of capitalized items which resists summarization and breaks investment down to the invoice level.
Another available, tax-cutting provision is that the law retained the Domestic International Sales Corporation (DISC) distinction that has been part of the U.S. corporate income-tax code since 1971.
“This benefit works for all legal entity types,” Boccaccio said. “For instance, in a C-Corp structure, the DISC creates tax-deductible shareholder dividends. If you’re a U.S. manufacturer, you can theoretically run all exports through the DISC, and enjoy a deduction at the U.S. manufacturing company.”
Boccaccio said that manufacturers also should take a closer look at R&D tax credits because many of them aren’t claiming credit for activities that are indeed eligible.
“The R&D Credit includes activities related to the development of most improvement to a product, process, technique, formula, or software that is new to the organization,” he said. “We are finding significant incremental R&D tax credits [for clients] through a granular review of activities. The benefit is there, and many companies are leaving significant tax savings on the table.”
Boccaccio said that Ryan finds “manufacturers are generally good at picking up [activities related to] automation, manufacturing operations, system integrations and so on – stuff you think about in the traditional definition of R&D.” But beyond those, Ryan’s examinations also typically find creditable “amounts paid to technical sales employees, raw materials used in first-run article production, raw materials utilized in custom manufacturing, amounts paid to third-party testing contractors, [and for] machine-controls programs” and so on. Boccaccio urges companies to engage a third-party to review all open tax years to ensure all benefit has been claimed.