Looking Forward to 2023: A Recap of 2022 for Manufacturing and Distribution

Looking Forward to 2023: A Recap of 2022 for Manufacturing and Distribution

With 2023 officially in full swing, we thought it would be helpful to look back at 2022’s trends, such as inflation, staffing shortages and supply chain issues. In today's global economy, the supply chain is spread out and disjointed, making it difficult for CFOs to get a clear picture of what’s happening and where there might be problems. However, in times of record-high inflation, we presented a variety of strategies that companies may still want to consider when looking at ways to save costs in 2023. Let’s review them.

Bonus Depreciation, Then and Now

Bonus depreciation is a tax incentive that allows taxpayers to deduct a larger percentage of the cost of qualifying property in the year it’s placed in service. Qualified property may include machinery, equipment, vehicles and depreciable computer software, and it can be used for capital improvements if the modification is new, has a useful life of 20 years or less and was not purchased from a related party.

While 2022 marked the last chance to take advantage of the 100% bonus depreciation, it's essential to take advantage of its latest reduction. In 2017, The Tax Cut and Jobs Act increased the first-year bonus depreciation from 50% to 100%. However, this percentage is now reduced to 80% in 2023, 60% in 2024 and so on until it’s eliminated by 2027 (unless Congress changes it). If you need to make property improvements or other purchases, getting them in service sooner than later will allow you to take advantage of bonus depreciation to expense up to 80% of the cost.

Leveraging Tax Incentives

The Green Energy Tax Incentive

Signed into law in August 2022, the Inflation Reduction Act (IRA) includes provisions that could significantly boost climate actions through a higher energy tax deduction and features numerous tax incentives for renewable energy and clean energy investments. This legislation also marks the country’s most significant investment in clean manufacturing, leveraging tax dollars to grow clean energy jobs in the U.S.

Section 48C incentivizes manufacturers with a clean energy tax credit for the cost of factories to manufacture clean energy components, allowing them to earn tax credit for each unit of clean energy components manufactured. Effective Jan. 1, 2023, the Act expands Section 48C to provide $10 billion in tax credits. The tax credit is 30% of the amount invested in new or upgraded factories to build specified renewable energy components.

The list of manufactured products that will qualify for this credit was also expanded. Qualifying property and components now includes:

  • Products designed to be used to produce energy from water, solar, wind, geothermal and other renewable resources
  • Grid modernization equipment and components
  • Property designed to capture, remove, use or sequester carbon oxide emissions
  • Equipment designed to refine, electrolyze or blend any fuel, chemical or product that is renewable or low carbon and low emission
  • Products designed to produce energy conservation technologies
  • Technology, components and materials for electric or fuel cell vehicles and their associated charging or refueling infrastructure

This amendment will additionally broadly include all other advanced energy property designed to reduce greenhouse gas emissions as determined by the IRS, opening the door for new technologies to benefit from these credits in the future.

The Research and Development (R&D) Tax Credit

Changes to the Research and Development (R&D) Tax Credit went into effect for the 2022 tax year, making it a good time for your CFO to evaluate whether your company is maximizing this opportunity to reduce its income tax liabilities. To help you determine if and how your business may be able to benefit from this opportunity, here are four key things to know:

1. Manufacturing and distribution companies can qualify for the R&D Tax Credit.

Any company that’s investing in product or process improvement can qualify for the federal R&D Tax Credit, which is a dollar-for-dollar offset against regular income tax liability that can be used to hire additional employees, invest in new equipment or fund other business initiatives. Any company that invests in product or process improvement can qualify — and the improvements simply need to be new to your company, not the industry. For manufacturers and distributors, this can include activities like process optimization, alternative material testing, and prototyping or modeling.

2. Qualification is based on a four-part test.

The credit is designed to incentivize certain research activities by reducing your company’s liabilities. These R&D activities must meet a four-part test defined by the IRS:

  • Permitted purpose
  • Elimination of uncertainty
  • Process of experimentation
  • Technological in nature

The credit equals a defined percentage of qualified research expenses in excess of a base amount, including the salaries of employees and supervisors engaged in the research, as well as research-related supplies, computer expenses, outside consultants, engineers or programmers.

3. Thorough documentation is required.

Taking effect in 2022, companies must include a thorough breakdown of all business components related to the credit claim, identifying the research activities and the employees responsible for each activity. In addition, the total cost of employee wages, qualified supplies and contracted research must be submitted.

4. Deductions for R&D expenses must be amortized.

Finally, for taxable years that began after Dec. 31, 2021, R&D expenses not reduced by R&D credits taken must be amortized over five years for domestic claims and 15 years for foreign research. Previously, businesses could immediately deduct these types of expenses in year one. It’s worth noting that an effort has been underway asking Congress to repeal the amortization requirement for R&D expenses to increase U.S. competitiveness.

Manufacturing and distribution companies of all sizes are eligible to take advantage of the dollar-for-dollar savings available through the R&D Tax Credit if they invest in the development or improvement of products, processes or technology.

Addressing Supply Chain

Communication Is Key

Supply chains are an intricate puzzle of moving pieces, and disruptions can cause ripple effects felt throughout the entire system. By taking a companywide view rather than focusing on one link, CFOs can identify areas of potential improvement and possible risks to ease the strain on supply chains.

Streamlining communication will allow you to take note of hidden costs in your supply chain that affect your income statement, such as transit times or logistical delays. Hiring or partnering with experienced professionals with connections and creative thinking is essential to devising supply chain solutions that will work for your company. Take a category manager, for instance. This position understands your production cycle, formulates potential alternative action plans, foresees industry changes and engages with suppliers to negotiate prices. Or, if your company doesn’t want to increase its overhead, another option is to partner with a cutting-edge logistics company that can help with this process.

Considering Supply Chain Audits or Assessments

It can be difficult to restructure your process with so many interrelated parts. A supply chain audit or assessment can provide a holistic look at your supply chain process and allow an expert to find and address your pain points. It prioritizes your solutions and guides rebuilding.

If your business sells products or services online or employs workers in multiple states, you likely have sales and income tax nexus in numerous jurisdictions. Therefore, knowing where your inventory is sold, where you're selling it and where your employees are located is crucial — especially when it comes to audit scrutiny. Understanding the physical movement of goods — and how it interconnects with all other aspects of the business — can help your system be more efficient and resilient.

Taking Advantage of LIFO

In any business, inventory is a critical component. One of the most favored methods when accounting for inventory is first in, first out (FIFO). The internationally approved approach appeals to many companies because it’s a straightforward process, allowing the oldest inventory items to be recorded as sold first. However, with record-high inflation, you should also consider the last in, first out (LIFO) accounting method because it can more clearly reflect current income by valuing inventory at its current market price. Under this method, a business records its newest products as the first items sold. LIFO is beneficial for any company facing rising costs as it allows you to report lower net income and lower book values due to the impacts of inflation, often resulting in lower taxation.

The tax benefits of LIFO grow as inflation increases and if inventory quantities remain steady or increase. As a result, manufacturers and distributors using LIFO may see their cash flow improve in the short- and long-term, especially if inflationary trends continue.

Final Comments

Implementing innovative solutions, addressing supply chain disruptions and taking advantage of the many new tax incentives can help your company navigate the recessionary concerns of 2023 and enable you to thrive. If you don’t know where to start, our dedicated manufacturing and distribution team at CBIZ can help to redesign, restructure and find solutions for your supply chain management.

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CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ). This publication is protected by U.S. and international copyright laws and treaties. Material contained in this publication is informational and promotional in nature and not intended to be specific financial, tax or consulting advice. Readers are advised to seek professional consultation regarding circumstances affecting their organization.

Looking Forward to 2023: A Recap of 2022 for Manufacturing and Distributionhttps://www.cbiz.com/LinkClick.aspx?fileticket=ejPhJkCKq-o%3d&portalid=02023-01-24T17:00:00-05:00With 2023 officially in full swing, we thought it would be helpful to look back at 2022’s trends, such as inflation, staffing shortages and supply chain issues.Planning & Tax MinimizationManufacturing & DistributionState & Local TaxYes