With the continued increase in overseas manufacturing, both state and local governments have developed tax exemptions and credits to entice businesses to keep manufacturing in the U.S. Here are some ideas that could help your manufacturing business mitigate its sales and income tax liabilities.
Sales Tax Exemptions
Several sales tax exemptions are available to manufacturers. Some are industry-specific, while others apply to numerous industries but are commonly used by manufacturers. Each of the exemptions described below can be extremely beneficial and result in significant sales tax savings.
Resale Exemption: The most common exemption available to manufacturers is the resale exemption. Any items to be resold as a part of your product may be purchased exempt from tax. This includes the components of your product as well as other items that will be resold along with it, such as packaging. It's common for businesses to miss this exemption and significantly overpay sales and use tax.
Manufacturing Machinery & Equipment Exemption: Another exemption specific to manufacturers is the manufacturing machinery and equipment exemption. While it differs by state, it generally applies to purchase of machinery and equipment to be primarily used in manufacturing as well as purchases of repair and maintenance items to keep the machinery and equipment functioning. It even can include equipment used to repair exempt machinery and equipment, consumables and other production-related property. It's important to carefully review state law to determine what specifically qualifies for this exemption.
These exemptions allow for many manufacturing-related purchases to be made free of sales tax. For manufacturers, the use of these exemptions can significantly reduce their sales and use tax liability -- and potentially increase profit. One little-known fact is that some states have expanded exemptions specifically for food manufacturers. Many companies are unaware they have overpaid taxes, making a records review potentially fruitful.
State Income Tax Structuring
By planning where your company does business and in which states it files tax returns, you may be able to reduce your state income tax liability. While it may seem counterintuitive, increasing the number of states where you file tax returns doesn't always increase your tax. Due to the variance by state in income tax rules, it's possible to pay tax on less than 100 percent of your income, depending on the states in which you file returns. Correct application of state rules and options can result in significant tax savings.
State Research & Experimentation Credits
Most states offer a research credit similar to the federal Credit for Increasing Research Activities. Many of the same expenses qualify, and the calculations tend to be similar to the federal credit, making it simple to take advantage of the state credit by computing your federal credit. Be sure to find out if your state has a research credit to realize potential income tax savings for your manufacturing business.
These ideas just scratch the surface of the savings and tax-planning strategies available to manufacturers.
Joanna Simek is a director, tax, at BKD. Reach her at firstname.lastname@example.org. Christy McGovern also contributed to this story.