As the year draws to a close, it’s a great time for manufacturers and distributors to evaluate their tax planning strategies and ensure they’re maximizing available opportunities. Below are five critical areas to focus on as you prepare for year-end and plan for 2025.
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Bonus Depreciation and Section 179
Manufacturing is a capital-intensive industry, making depreciation strategies a significant tax planning focus. For qualifying assets placed in service before January 1, 2025, bonus depreciation is 60% of eligible cost. Eligible assets placed in service after December 31, 2024, and before January 1, 2026, are currently subject to 40% bonus deprecation. However, delaying fixed asset investments might provide opportunities for future incentives, such as the potential reinstatement of 100% bonus depreciation with the passage of tax reform legislation.
Additionally, Section 179 allows businesses to deduct the cost of certain property immediately, up to the current year’s limits. Keep in mind that assets must be “placed in service” before year-end, meaning they must be operational and available for use, not just ordered. Furthermore, taxpayers must have sufficient taxable income in the year the eligible property is placed in service in order to take advantage of the Sec. 179 deduction in that year.
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New York State Tax Credits and Incentives
For businesses operating in New York, several state-specific tax credits and incentives could reduce your tax liability. These include:
- Investment Tax Credit (ITC): For fixed asset additions used in manufacturing.
- Manufacturers Real Property Tax Credit: Available to qualified manufacturers in New York.
- Employment Incentive Credit (EIC): Linked to job growth and expansions, enhancing the benefits of the investment tax credit.
Reviewing your eligibility for these credits is a crucial step in year-end planning.
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Capitalization vs. Repair Regulations
The distinction between capitalization and repairs is essential for M&D businesses with significant fixed assets. Under IRS repair regulations, expenses must be capitalized if they improve, restore, or adapt a unit of property. However, repairs can often be deducted immediately. Evaluating whether expenses qualify as repairs or need to be capitalized can provide immediate tax benefits and improve cash flow.
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De Minimis Safe Harbor Election
The de minimis safe harbor allows businesses to expense certain lower-cost assets immediately. The safe harbor is an annual election made on the business’ tax return. To take advantage of this, companies must have a written policy in place. The limits are:
- $5,000 per invoice or item for businesses with an applicable financial statement (AFS-generally applies to audited financial statements)
- $2,500 per invoice or item for those without an AFS.
Is your policy established and documented for the entire year? If you don’t currently have a policy in place, now is the time to create one to ensure compliance and maximize this tax benefit.
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Evaluation of Accounting Methods
Assessing your accounting methods can reveal tax-saving opportunities:
- Small business taxpayers: Small taxpayers (those with average annual gross receipts for the preceding three years of less than $30 million (2024 figure)) may qualify to use the cash method accounting and may qualify to adopt simplified methods of account for inventory, which can simplify recordkeeping and defer income. Such method changes are generally automatic changes and can be made up until the time of filing the tax return for the year of change. Note that for these methods are for tax purposes only and generally will not impact financial reporting.
Accrual Basis Accounting: For accrual taxpayers, review accounting for revenue and expenses to determine if accounting methods can be changed to defer revenue and/or accelerate deductions. Examples may include deducting certain prepaid expenses when paid and deducting compensation that is fixed and determinable and paid within 2 ½ months of year end. Many such changes qualify as automatic changes and can be made up until the time of filing the tax returns. Non-automatic changes must be made prior to the end of the year that the change is to be effective, require the payment of a user fee to the IRS, and are subject to IRS approval.
Final Thoughts
By addressing the above considerations now, you can reduce your tax liability and position your business for a strong start to 2025. If you’d like to discuss these strategies further or explore how they apply to your specific business, feel free to reach out. Our team is here to help.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
