Tax legislation signed at the end of last year as part of a federal spending package includes significant breaks for manufacturers.
Notably, the Taxpayer Certainty and Disaster Tax Relief Act of 2019 extends various incentives, repeals a tax specifically aimed at manufacturing companies and creates a new credit for employers in disaster areas.
Here's a brief overview of six provisions affecting manufacturers.
Work Opportunity Tax Credit
Just as the WOTC was about to expire at the end of 2019, the new law restored it to life. The WOTC is now extended through 2020 for businesses hiring workers from certain disadvantaged "target" groups.
In general, the WOTC is equal to 40% of the first $6,000 of wages, for a maximum credit of $2,400 per worker. So, if your company hires 10 workers eligible for the basic credit, you can claim a WOTC of $24,000 for 2020. For disabled veterans, the credit is available for the first $24,000 of wages, for a maximum credit of $9,600 per worker.
Empowerment Zone Incentives
Thanks to an extension, manufacturers operating in designated "empowerment zones" continue to be eligible for several tax breaks, including:
- A 20% wage credit,
- Liberal expensing rules under Section 179,
- Tax-exempt bond financing, and
- Deferral of capital gains tax on the sale of qualified assets sold and replaced.
The wage credit is equal to 20% of the first $15,000 of wages, up to a maximum $3,000 credit per worker. Although you can combine the wage credit with the WOTC, you can't double dip. In other words, you can't claim the same wages for both credits. You must, for example, pay an empowerment zone worker total wages of $21,000 to claim the full amount for both credits, up to the maximum of $5,400.
Family and Medical Leave Credit
As in many industries, manufacturing sector employers are realizing the benefits of accommodating workers who need more paid time off. The Tax Cuts and Jobs Act (TCJA) authorized a credit for businesses offering paid family and medical leaves to workers. But the TCJA limited this tax break to 2018 and 2019. The new law has extended it through 2020.
To qualify for the credit, you must provide employees with leave of at least two weeks and pay at least 50% of the employee's regular earnings during the leave period. The credit's value ranges from 12.5% to 25%, depending on the level of pay. The maximum period for calculating the family and medical leave credit is 12 weeks per worker.
The new law also retroactively reinstates a diverse group of energy tax incentives that had expired. In some cases, Congress simply extended existing energy-related credits.
The long list of tax breaks potentially available to manufacturers includes credits for:
- Nonbusiness energy property,
- Qualified fuel cell vehicles,
- Alternative fuel vehicle refueling property, and
- Energy-efficient commercial buildings.
Furthermore, incentives for biodiesel and renewable diesel are extended through 2022. All expired tax credits are retroactively reinstated to 2018.
Disaster Relief Credit
Among other disaster relief provisions, the 2019 tax law creates a credit that may benefit manufacturers in federally designated disaster areas. It's available for wages paid to qualified workers affected by disasters that occurred between January 1, 2018, and 30 days after December 29, 2019, the date the new tax law was enacted.
You can claim a 40% credit for the first $6,000 of wages paid to an employee from a core disaster area, for a maximum of $2,400 per worker. The credit is treated as part of the general business credit and applies to wages paid regardless of whether services associated with the wages were performed. The new law also provides automatic 60-day extensions for any tax filings by employers in designated disaster areas.
Medical Device Tax
Although it's not a tax credit, Congressional repeal of the medical device tax also benefits manufacturers. The Affordable Care Act (ACA) had imposed a 2.3% tax on the sale price of any taxable medical device. For this purpose, a taxable medical device is one that's intended for humans — such as a medical instrument, apparatus, implement, machine, contrivance, implant or any similar or related article.
From the beginning, the tax was mired in controversy. After a two-year moratorium, it went into effect in 2016 and was renewed in 2018. That same year, the House passed a bill to repeal the tax, but the Senate failed to act on it. In the meantime, the tax was suspended several times. Now, it's finally been repealed.
For More Information
This is just a snapshot of six key provisions in the newest tax legislation. In addition to considering these tax-saving opportunities for 2019 and 2020, you may want to file an amended return for breaks that were retroactively resurrected for 2018. Contact us for a more nuanced overview of the law and advice specific to your manufacturing company.