Manufacturers: Be Aware of These 3 Business Tax Provisions Currently in Limbo

Are you up to date on the latest tax law changes that could affect your manufacturing business? Barring further legislation, certain key provisions have expired or have begun to phase out. Here are three that could have a significant impact on your company:

1. Beneficial business interest deduction rules. Under longstanding rules, a business entity could generally deduct the full amount of their business interest expenses. However, beginning in 2018, the Tax Cuts and Jobs Act (TCJA) generally limited the deduction for business interest to 30% of a business’s adjusted taxable income (ATI) for the year.

Previously, ATI was computed without regard to the following items:

• Income, deduction, gain or loss not properly allocable to a business,
• Business interest income and expense,
• Net operating losses (NOLs),
• The 20% qualified business income (QBI) deduction for pass-through entities, and
• Any deduction allowable for depreciation, amortization or depletion.

But here’s the kicker: The final item — regarding depreciation, amortization or depletion — is available only for tax years beginning before 2022. Absent further legislation, the TCJA now requires a business to include depreciation, amortization and depletion in the ATI calculation.

2. Current deduction for research and experimentation (R&E) expenses. Business entities, such as manufacturers, can still claim a generous credit for qualified research expenses incurred during the year. However, in the past they could also deduct qualified R&E costs under a separate tax code provision.

Notably, a business had the option of taking a current deduction or amortizing the expenses over a 60-month (five-year) period. Also, software developmental costs were treated as R&E expenses that could be deducted currently or amortized over the five-year period or three years from the date property was placed in service.

However, under the TCJA, the option for the current deduction is no longer available for tax years beginning in 2022. Thus, qualified expenses must be amortized over the five-year period. Plus, there’s no provision allowing accelerated write-off if the property has been retired, abandoned or otherwise disposed of.

3. First-year bonus depreciation. Section 179 allows manufacturers to currently deduct the cost of most property placed in service during the year up to a generous limit. The limit for 2023 is $1.16 million, up from $1.08 million in 2022. But the deduction is subject to a phase-out threshold of $2.89 million for 2023, up from $2.7 million in 2022. Furthermore, the deduction can’t exceed the amount of your taxable income. So, if your annual income is $1 million, the deduction is limited to $1 million.

Bear in mind that Sec. 179 is elective, and you can determine what will be best for your manufacturing company’s circumstances. Claiming more Sec. 179 than you’re allowed will mean that there’s an amount carried forward, whereas opting to claim just the amount needed to bring your income to $0 means that more will be allocated to be depreciated annually in subsequent years.

Fortunately, Sec. 179 can be complemented by 80% first-year bonus depreciation in 2023 (down from 100% in 2022), provided by the TCJA for qualified property placed in service during the year. This includes property depreciable under the Modified Accelerated Cost Recovery System (MACRS) with a cost recovery period of 20 years or less. The TCJA also extended this tax break to used property. (Previously, it was limited to new property.)

The TCJA gradually phases out bonus depreciation over a five-year period, beginning in 2023. For 2023, 80% of the cost of qualifying property can be deducted using bonus depreciation. After 2026, no bonus depreciation will be allowed, unless Congress revisits this issue.

Many tax professionals expected Congress to address these tax provisions (along with many others known as “tax extenders”) at the end of 2022. However, tax extender legislation wasn’t included in the Consolidated Appropriations Act of 2023. Turn to Kirsch CPA Group with questions regarding your manufacturing business’s taxes. We can keep you apprised of the latest tax law changes.

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