The “fiscal cliff” tax bill passed by Congress on New Year’s Day (The American Taxpayer Relief Act of 2012) received tremendous attention for its effect on individual tax rates, but it also contained some provisions that are friendly to small manufacturers. The two main items were: the extension of the Research and Development R&D Tax Credit that expired in 2011, and enhanced Section 179 capital expenditure deduction limits for 2013.
Extension of the R&D Tax Credit
The recent tax package included an extension of the R&D tax credit retroactively to January 1, 2012 and an extension of the credit through December 31, 2013. The R&D credit was introduced in 1981 to promote innovation and jobs. While it has never been made a permanent part of the U.S. Tax Code, it has always gathered strong bi-partisan support to be extended on a temporary basis. Since 2004, when the IRS eliminated some of its more restrictive language, the R&D credit has increasingly been available for just about any small manufacturer that employs engineers or engages in product and process testing. The extension of the R&D credit benefits manufacturers of all kinds, including those that design and develop their own products as well as those that make parts for their OEM customers (i.e. job shops and contract manufacturers). Metal stampers and fabricators, precision machinists, mold builders and injection molders, and tool and die makers are all examples of industries that are eligible for the R&D tax credit. Generally, about 70 percent of the credit dollars are derived from the salaries of the employees devoted to the qualified research activities, thus making it a wage-based credit available to a broad range of companies. With the extension of the R&D credit, American manufacturers now have the assurance that the credit will be available through 2013 and may feel more confident to invest further in new products and processes.
Enhanced Section 179 Capital Expenditure Deduction Limits for 2013 (and 2012 Retroactive)
A second component of the American Taxpayer Relief Act of 2012 was an extension of the U.S tax code’s Section 179 tax deduction. The 179 deduction allows companies to deduct the entire purchase price of qualifying office equipment, software, and other business needs in one year, rather than over the typical five- to seven- year depreciation schedules, thus reducing their current year taxable income by the entire purchase price. Typically, businesses that utilize non-customized ERP software, inventory software, stock control software, warehouse management systems, and other expensive, off-the-shelf software that performs enterprise resource planning functions can benefit from this tax deduction. Without Section 179 they would need to follow the normal depreciation schedule, which could be 5-7 years.
So it might be worthwhile to check out these changes and see what it means for your business.
*Please note the information contained in this article does not constitute tax advice, nor should be interpreted as an endorsement of any product or service, and cannot be used by the reader for promoting, marketing, or recommending any matter or actions addressed in this article to other parties.