If Your Manufacturing Company is Considered “Small,” it May be Eligible for Tax Benefits
Small-sized manufacturers may enjoy several tax advantages allowing them to reduce tax bills, defer taxes and simplify the reporting process. Federal tax rules used to generally define a “small business” as one with average annual gross receipts of $5 million or less ($1 million or $10 million in some cases) for the three preceding tax years. The Tax Cuts and Jobs Act (TCJA) increased the threshold to $25 million for tax years beginning after 2017.
The increased threshold expands eligibility for small business tax benefits to a greater number of manufacturers. It also simplifies tax compliance by establishing a uniform definition of “small business.” Previously, different thresholds applied depending on the tax accounting rules involved, as well as a company’s industry and whether it carried inventories.
Small business benefits
Potential benefits of small business status include:
Use of the cash accounting method. Eligible manufacturers that pass the gross receipts test are eligible to use the cash method of accounting for tax purposes. The cash method allows a business greater control over the recognition taxable income during a year.
Avoidance of inventory accounting requirements. Eligible manufacturers need not account for inventories, which can be complex, time consuming and expensive.
Relief from uniform capitalization rules. Eligible manufacturers are exempt from these rules, which require companies to capitalize rather than expense certain overhead costs, adding complexity to the tax reporting process and potentially increasing their tax liability.
Eligibility for the completed contract method. Eligible manufacturers can use the completed contract method, rather than the percentage-of-completion method, to account for long-term contracts expected to be completed within two years. This allows them to defer tax until a contract is substantially complete.
Full deductibility of business interest. The TCJA generally capped deductions for net business interest expense at 30% of adjusted taxable income. Eligible manufacturers are exempt from this limit.
Related entities’ receipts included. When determining your manufacturing company’s gross receipts, you must include not only your own receipts, but also those earned by certain related entities, such as other members of a parent-subsidiary group, a brother-sister group or combined group under common control.
See the small picture
If your manufacturing company’s average gross receipts are $25 million or less, contact us to find out whether the business is eligible for small business tax benefits. If you are, we can determine whether it would be worthwhile to change accounting methods to take advantage of these benefits. If the business is not, there may be planning opportunities to qualify for these benefits in the future.