January 11, 2024

Taxing Future of Manufacturing Compliance

By Sam Eartly, Supervisor, Tax & Business Services

Taxing Future of Manufacturing Compliance Industrial Products

With each passing tax year, things somehow keep getting more complicated. One has to wonder, where’s the tax simplification we’ve been promised? As you likely know, 2022 brought changes to R&D expense deductions. This represented a change for manufacturers that could significantly move the needle come tax time. Two factors make planning particularly critical for 2023: first, it’s year 2 of the Section 174 expense limitation. Second, the long awaited sunsetting of the bonus depreciation deduction now takes effect.

2023 Marcum Year-End Tax Guide

As part of the Tax Cuts & Jobs Act of 2017 (“TCJA”), Section 174 Expenses deductions have become limited. Much debate and back and forth raged in Congress but there has been no movement on proposals to allow these expenses to be fully deducted under the tax code. For Manufactures (and many other industries) this means your R&D expenses (and then some!) are no longer eligible to be deducted in the year they occur. Rather, you are required to addback those expenses and deduct them over a 5-year period (for domestic expenses) or a 15-year period (for foreign expenses). Many business owners have felt the ripple of 174 directly affect their pockets. A question we’ve been asked as business advisors is “Can we just not claim the R&D credit then?” Well, unfortunately the answer is not really. If you have a history of claiming the R&D credit and your overall expenses haven’t changed much, the IRS will likely be looking for the credit and these expenses to be added back.

RESOURCE: Research and Development: Tax Credit Benefits and Capitalization Considerations

Another major issue for 2023 is the reduction of allowed bonus depreciation under Sec. 168(k) from 100% down to 80%. This is part of an annual sunsetting of that bonus expense laid out in the TCJA. The phase-out starts in 2023 and continues reducing the bonus allowable by 20% annually until it is fully disallowed in 2027. Now, there are still options here, such as Section 179 expensing, but that comes with its own set of stringent rules and regulations. So that you don’t need a nap mid-article, I’ll save the finer details of depreciation allowances for the future.

The bottom line for manufacturers and business owners of all types is that things have never been more complex. With law changes occurring rapidly and dormant policies from 2017 coming into effect, it is critical to work with a trusted tax advisor to help best position yourself and, just as importantly, be aware of what to expect in the future.