Incentives and tax credits can go a long way in reducing costs and boosting bottom lines for manufacturers. While some manufacturers have entire teams dedicated to taking full advantage of what’s available to them, many others could be leaving money on the table.
Good Jobs First, a nonprofit that tracks federal, state and local economic development incentives, found that Apple received $513 million worth of tax breaks since 2009. It has benefited from 11 state and local subsidy deals which reduced its tax burdens as states compete against one another to win its investments.
In 2009, North Carolina offered a deal that saved the company $320.7 million on a $1 billion, 500,000 square foot data center in Catawba County. Project Covington, a redevelopment in downtown Baltimore being spearheaded by Under Armour CEO Kevin Plank, is eligible for more than $760 million in city and state property tax credits.
Big companies not only are landing jaw-dropping credits due to their scale, but they also are getting them because they ensure that when they make any investment, they utilize any and all offerings to reduce every last cent of expense. Many smaller and mid-market manufacturers could benefit by being more diligent.
“As manufacturers analyze locations in the U.S., they should consider tapping into economic development incentives to further improve their performance.”
The Council for Community and Economic Development Research maintains a database of state tax incentives and the Tax Foundation also tracks effective tax rates on manufacturers by state. Gregory Burkart, Managing Director and Practice Leader of Site Selection and Business Incentive Advisory Services at Duff & Phelps, said that manufacturers can best benefit from training incentives, abatements and exemptions, payments or fees in lieu of tax (PILOT or FILOT) and Tax Increment Financing (TIF). “As manufacturers analyze locations in the U.S., they should consider tapping into economic development incentives to further improve their performance,” Burkart said.
Regardless of where they base their operations in the United States, one of the easiest and most important things manufacturers can do is maximize their use of the R&D tax credit. The new Protecting Americans from Tax Hikes Act (PATH) of 2015 not only made the credit permanent but added enhancements to offer more savings. Whereas many small and mid-sized manufacturers couldn’t claim the credit because owners were subject to the alternative minimum tax (AMT), that hurdle has now been eliminated. The federal R&D tax credit averages roughly 6.5% of combined qualified R&D labor and supplies.
Dan Mennel, West regional leader of Strategic Federal Tax Services at Grant Thornton, said that while manufacturers are currently saving $6 billion per year through R&D tax credits, they are still leaving money behind. “More important[ly], manufacturers are overlooking recent guidance that has expanded their opportunities. New types of pilot models and prototypes can now be expensed,” Mennel said.
Section 174 now allows manufacturers to immediately deduct the cost of qualified research expenses that constitute anything a company does to make its products faster, better or cheaper. Under the R&D credit, that can include everything from capital investments and travel to supplies and materials that go into new solutions or trial-and-error processes. The Joint Committee on Taxation estimates that businesses could save an additional $2 billion per year by better expensing their research costs under the new provisions.
Dean Zerbe, managing director for alliantgroup, said that eliminating the AMT hurdle has opened the credit to many more smaller and mid-market manufacturers. “Considering this modification and that Congress has now ensured that business owners can count on the credit as part of their annual tax planning, manufacturers would be wise to take a hard look [at it],” Zerbe said.