As the midpoint of the year fast approaches, it's a good time for manufacturers to assess their tax status and plan appropriate strategies for reducing their 2022 tax liability.
Although each situation is unique, here are seven general tax moves that could potentially lighten your manufacturing company's tax load this year.
Place Business Property Into Service
Federal tax law provides generous write-offs for machinery and equipment placed into service anytime in 2022. Specifically, your company may be entitled to one or more of the following tax breaks:
- Section 179 deduction. For 2022, you can currently deduct up to $1.08 million of the cost of qualified property. The break begins to phase out dollar for dollar when 2022 asset acquisitions exceed $2.7 million.
- First-year bonus depreciation. Your company can claim a 100% first-year bonus depreciation deduction for qualified property placed into service in 2022. (Bonus depreciation is scheduled to be reduced to 80% for 2023, so 2022 might be an especially good year to purchase and place into service qualifying property.)
- Regular depreciation. If any cost remains, your company may start taking regular depreciation deductions under IRS-approved tables.
Be aware that special rules (such as limits for vehicles) may affect these deductions.
Do Your Research
Your manufacturing company may qualify for a research tax credit (often referred to as the "research and development," "R&D" or "research and experimentation" credit) for increases to qualified expenses relating to research and experimentation. Generally, the credit is 20% of the qualified expenses over a base amount, but this complex calculation can be avoided with a simplified 14% credit.
In addition, your business may be entitled to a deduction for qualified research and development (R&D) costs. However, under a recent tax law change, R&D costs must be amortized over five years, beginning in 2022.
Target Your New Hires
In today's tight labor market, consider searching for job candidates outside the usual sources. Doing so may provide a tax credit. For example, if you hire workers from one of several "target" groups of disadvantaged individuals, you may claim the Work Opportunity Tax Credit (WOTC). Generally, the WOTC is equal to 40% of the first $6,000 of first-year wages, for a maximum $2,400 per worker. But it can be larger for members of certain groups, such as disabled veterans. The WOTC was recently extended through 2025.
You may also claim a special summertime credit for hiring youths ages 16 or 17 residing in an empowerment zone or enterprise community. This credit equals 40% of the first $3,000 of wages, for a maximum $1,200 per qualified worker.
Schedule Business Travel
If you're returning to regular long-distance business trips, be mindful of the basic tax rules. Generally, you can deduct the entire cost of round-trip airfare if the primary purpose of the travel is business related.
Plus, you can deduct your business-related lodging, meals and local transportation costs. For 2022, the normal 50% limit on business meals has doubled to 100% for food and beverages provided by restaurants.
Make Minor Repairs
Do you need to repair broken windows or leaky faucets at your manufacturing plant? Minor repairs are currently deductible as business expenses. Make sure you take care of these nuisances before the end of the year to increase your deduction for 2022.
On the other hand, the cost of capital improvements must be depreciated over time. For instance, this applies to major projects like adding a new wing to your facility. The applicable regulations spell out several safe-harbor rules for distinguishing repairs from improvements.
Employ Your Spouse and Adult Children
Even if you hire target group workers (see strategy #3), you still might require additional staffing during the summer months when many employees take some time off. Consider adding your spouse or adult children, or both, to the company payroll.
This entitles the family member to tax perks like retirement plan benefits and health insurance. At the same time, your company can deduct wages and benefit expenses just as it does for other employees — as long as the family members do legitimate work and are compensated similarly to what nonfamily employees would be paid for the same work.
Gather the Troops
Normally, an employer can deduct only 50% of the cost of business meals it furnishes for its employees. However, under a long-standing tax law exception, a company can deduct 100% of the cost of a party it throws for the staff.
For example, your company may host a summer barbecue to celebrate its good fortune so far this year. All the costs — including food, drinks and recreational expenses — are fully deductible. One catch: You must invite all employees. In other words, you can't restrict the outing to just executives.
Take Action Now
Bear in mind that these are just some possible ways your manufacturing company can cut taxes midway through the year. Others may apply to your specific situation. We can help you determine the right midyear actions most beneficial to your manufacturing company.