Year-End Tax and Accounting Strategies for the Manufacturing Sector

As we approach the close of 2024, manufacturers are under pressure to optimize their tax positions and make strategic financial decisions. With only a few weeks left in the year, companies need to consider taking action to capture certain tax benefits, ensure compliance and prepare for new challenges in 2025. In this article we will highlight several strategic accounting and tax matters for manufacturers to focus on during the remaining weeks of 2024.

Another Decrease for Bonus Depreciation and Capital Expenditure Planning

The final days of 2024 mark the waning era of 60% bonus depreciation under the Tax Cuts and Jobs Act (TCJA). Starting in 2025, bonus depreciation further phases down to 40%. Here’s what companies can do:

• Act before year end to maximize deductions: Product manufacturers with pending capital investments should consider accelerating purchases of machinery and equipment before year end to lock in the higher benefits. After 2024, only 40% of the asset’s value can be expensed in the first year.
• Section 179 deductions: This is another option for smaller manufacturers, as they can consider using Section 179 expensing elections for qualifying assets. With the phase out of bonus depreciation, Section 179 remains a key tool for immediate tax savings. For 2024, businesses can deduct up to $1.22 million, but net income limits and phase-out thresholds exist. Due to these limitations and thresholds, larger manufacturers are often unable to benefit from Section 179.

Managing Inventory in a Tight Supply Chain Environment

Global supply chain challenges have continued to persist in 2024, making inventory management an important issue for tax planning. Companies should consider their inventory accounting methods and if there are options available to help minimize tax burdens and improve cash flow.

• Review inventory accounting methods: Companies using last-in-first-out (LIFO) inventory methods may benefit from lower taxable income if input costs have increased. However, if inventory levels have remained consistent or decreased, switching to a first-in-first-out (FIFO) method may offer advantages.
• Capitalize costs properly: Ensuring compliance with Section 263A (UNICAP) rules by reviewing costs that should be capitalized into inventory. When is the last time your UNICAP method has been evaluated? What has changed in your business that warrants further consideration on what costs need to be capitalized? Analysis here can help avoid potential issues during IRS audits.

Capturing Tax Credits Before Year-End

There are several different tax credits available to manufacturers that can be missed in the normal course of business. Generally, tax credits directly reduce the amount of income tax paid by a company or its owners on a dollar for dollar basis. Where as tax deductions only reduce tax at the taxpayers applicable tax rate.

• R&D tax credits: One of the most popular and beneficial credits is the research and development (R&D) tax credit. Many manufacturers still miss out on R&D credits by focusing only on product innovation. Process improvement, equipment testing and automation enhancements may qualify, providing significant potential tax savings. As equally important is proper documentation of qualifying activities, ensuring that relevant projects are documented well leading up to year end.
• Work opportunity tax credits: Credits for hiring employees from specific groups facing employment barriers, such as veterans or other key groups, providing labor cost savings.
• New markets tax credits: For businesses investing in underserved areas, particularly those setting up new manufacturing facility in low-income communities.

Preparing for State and Local Tax (SALT) Compliance in 2024 and Beyond

SALT requirements continue to evolve, with many states tightening nexus rules and increasing compliance burdens. As the year closes, companies need to review their multistate operations and ensure compliance with varying state regulations, including:

• Address changing nexus thresholds: Some states have introduced lower thresholds for establishing nexus, which can result in unexpected tax liabilities. Review your companies’ activities across different jurisdictions to determine where new filings are required.
• Manufacturing incentives credits: Several states offer credits for job creation, infrastructure investments or capital improvements in the manufacturing sector to promote economic development. These special credits and deductions can be easily missed if you don’t know what to look for or what questions to ask.
• Sales tax exemptions for manufacturing equipment: Certain states also offer exemptions on sales tax for manufacturing equipment purchases, offering immediate cost reductions for certain machinery upgrades.

Year-End Focus on Sustainability-Related Tax Credits

Manufacturing companies are leveraging tax incentives to meet their environmental, sustainability and governance (ESG) goals. Sustainability is an increasingly important driver of business strategy. With year-end approaching, companies need to ensure they are taking full advantage of available sustainability credits, including:

• Energy-efficient property deductions (Section 179D): For companies that have invested in energy efficient improvements to buildings in 2024, Section 179D offers valuable deductions. Ensuring that qualifying projects are completed by year-end, can help fully capture these benefits.
• Solar and renewable energy credits: Manufacturers investing in renewable energy projects should act quickly to qualify for various investment tax credits (ITC) before the close of 2024. These credits can offset a substantial portion of the costs associated with energy efficiency upgrades and sustainability projects.

With only a few days remaining in 2024, manufacturers need to prioritize key tax and accounting strategies to maximize their year-end benefits. From maximizing tax depreciation, to optimizing state tax compliance, these are a few actions that could help companies close the year on a strong financial footing and prepare for the challenges ahead in 2025. If you need assistance in identifying and maximizing any last-minute tax details, Weaver can help. Contact us today.

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