While the manufacturing sector continues to struggle with modest growth, Congress has provided a number of tax incentives for manufacturing companies. By now you know that the Bush-era tax cuts have been extended (this primarily affected individual tax rates). In order to spur spending, Congress has also increased the current benefit of a popular tax deduction - bonus depreciation. Also, certain tax credits have been extended. These items will affect your current year tax provision and likely impact your effective tax rate.
Under the new rules, eligible property placed in service after September 8, 2010 through December 31, 2011 will be eligible for 100% depreciation. Since many companies curtailed capital spending in 2009 and 2010 due to general economic conditions, perhaps now is the right time to implement this tax incentive. It certainly makes for an attractive rate of return on new equipment purchases.
Don’t forget about a couple of related items that will impact your tax provision and tax return. Specifically, if you claim the domestic production deduction (“DPAD” aka, “the manufacturer’s credit”), the increased tax depreciation will reduce, perhaps even eliminate, this benefit. While the depreciation deduction is a temporary item that will reverse (you will have lower tax depreciation expense in future years), the DPAD is a permanent benefit that will have been lost. Well, as long as you’re not paying taxes currently, perhaps it’s still good news.
This “super” bonus depreciation will also impact your UNICAP calculations. That is, presuming some of the depreciation is related to inventory-producing equipment, for tax purposes, a portion of this expense will be capitalized into your ending inventory.
With regard to tax credits, the extension of the Research & Development tax credit extension is also useful. Manufacturers typically conduct product or process improvement efforts that may qualify for R&D tax credit. If you haven’t already done so, you should evaluate the opportunity to claim this credit.
For detailed information regarding the 2010 tax changes, please refer to our special report at https://www.schneiderdowns.com/2010_Tax_Relief_Act. For other inquiries, contact Mary Richter, Shareholder, Tax Advisory Services, at (412) 697-5210 or firstname.lastname@example.org.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.