See our prior alert on how employers may qualify and be eligible for the ERC credit during qualified quarters between March 13, 2020, and Sept. 30, 2021.
Accrual to cash
Accrual to cash is an accounting method change that may be an effective way to defer taxable income — especially in industries where standard receivable terms are 90 days or more, including government contracts.
This method change recognizes revenue when actually or constructively received and deductions when expenses are paid. For 2022, many manufacturing companies with average gross receipts for the three prior years of $27 million or less may qualify to use the cash method of accounting.
Treating inventory as nonincidental materials and supplies
For 2022, companies with average gross receipts of $27 million or less for the prior three years may be able to treat the cost of inventory as nonincidental materials and supplies. The cost can be recovered by expensing it through cost of goods sold in the year either when the inventory is provided to the customer or the year when the company pays for the cost of the item, whichever is later.
Conversion costs, such as direct labor and overhead costs, aren’t considered nonincidental materials and supplies.
Deduction of subnormal goods
A company could be afforded a tax deduction for the write-down of subnormal goods if careful steps are followed. While many companies record an inventory obsolescence reserve on their financial statements, these reserves aren’t typically deductible for tax until realized.
If certain steps are taken, a deduction for subnormal goods may be permitted for income tax purposes. The lower inventory valuation must be substantiated by providing evidence of the following:
- Actual offerings
- Actual sales
- Actual contract cancellations
Assess opportunity to reduce capitalization costs
The IRS issued final regulations in late 2018 for companies that maintain inventory. The tax uniform inventory capitalization (UNICAP) rules changed how companies use either the simplified production method (SPM) or simplified resale method (SRM). They also added a new method, the modified simplified production method (MSPM), that should be considered for larger producers.
Most importantly, the regulations don’t change the types of costs subject to capitalization or the amounts of these costs. Rather, they affect whether these types and amounts are considered additional IRC Section 263A costs or IRC Section 471 costs, which impacts the computation of the absorption ratio.
These rules are required. If they haven’t already done so, companies should consider conforming to the new rules, and whether there’s an opportunity to reduce capitalization costs.
State pass-through entity tax elections
As a part of the 2017 tax legislation, Congress capped the deduction for state and local taxes by individual taxpayers to $10,000 per year for tax years 2018–2025. Businesses were not limited to the $10,000 limit. The pass-through entity tax regimes permitted by several states allow pass-through entities to become the entity-level taxpayer.
As of August 2022, 29 states have enacted pass-through entity tax regimes, providing an opportunity for owners of pass-through entities to claim a full deduction for state taxes paid on the pass-through entity’s income.
State and local tax planning
State and local taxes are constantly changing, and there is a potential for benefit in looking into them.
Sales and use tax refund review
With more than 9,000 state, local, and district-level jurisdictions imposing sales and use taxes, combined with varying tax laws among the states, companies often overlook opportunities for savings that can affect their bottom line. A sales and use tax refund review can help your business identify these missed opportunities by securing sales tax refunds and avoiding overpayments in the future.
The objective is to secure overpaid sales and use tax refunds by reviewing a company’s purchase-related information — such as fixed assets and accounts payable data along with related invoices — for the last three-to-four years.
The following manufacturing exemptions are typical opportunities for savings, available in some, but not all, states:
- Manufacturing equipment directly used in the manufacturing or processing
- Repair and replacement parts
- R&D equipment and parts
- Items purchased for resale
- Wrapping and packaging materials purchased for resale
- Federal and state government purchase-related exemptions
- Nontaxable services
- Other industry and state specific exemptions
Texas
The Texas enterprise zoneprovides cash grants to companies that open or expand a facility within Texas when there’s at least one out-of-state option.
Cash grant amounts are discretionary and issued based on projected job creation and capital investment.
