Economy and Politics Play a Role in Planning and Forecasting

Key Takeaways:
  • With high interest rates, manufacturers should strengthen cash flow and plan capital expenditures carefully to optimize tax benefits.
  • New tax credits, such as those under the CHIPS Act and Inflation Reduction Act, offer incentives for manufacturers investing in advanced and clean energy technologies.
  • Reviewing key financial strategies—like debt, inventory and carryforwards—will ensure a solid year-end financial position and set the stage for a productive 2025.

 

As we approach the end of 2024, manufacturers are diving into year-end planning to identify opportunities for tax savings and to enhance their financial performance. This year’s planning process is simplified by the stability of the federal tax code, but it’s also affected by a few regional trends.

First, manufacturing is slowing down a bit in the Midwest, but the contraction is more of a return to normal pre-COVID conditions than a true slowdown. Most manufacturers had strong years during the pandemic, and some even had their best years from 2021 through 2023. Now performance is returning to the pre-COVID normal levels. At the same time, high interest rates and the recent presidential election have slowed overall spending, impacting the ability of manufacturers to move product.

Additionally, in this part of the Midwest many manufacturers sell into the agriculture and aerospace industries. Agriculture has slowed due to a protracted delay in Washington over updating the Farm Bill and the looming drought, while aerospace is suffering a slowdown due in part to labor disputes and quality issues.

The new year will deliver even more uncertainty to manufacturers as a new presidential administration – with its own unique priorities and policies – sets the stage for potentially significant changes in the tax code.

With those caveats in mind, here is a guide to some of the essential areas of focus you should include in your manufacturing company’s year-end planning:

  • Cash flow – Strengthening your cash flow is crucial for financial forecasting and flexibility in planning for new initiatives and purchases in the coming year.
  • Capital expenditures – Do you need to make any major purchases before the end of the year to take advantage of tax deductions or depreciation? For 2024, bonus depreciation is at 60%, but it will fall to 40% in 2025, so accelerating large capital expenditures into this year may be the right play, depending on your overall financial condition.
  • Depreciation – The Section 179 depreciation maximum deduction is $1,220,000 for 2024. The deduction begins to phase out when the total amount of qualifying equipment purchased exceeds $3,050,000.
  • Debt – Assess your debt load and your ability to repay. If you borrowed during high-interest periods, paying off debt early might help you avoid costly interest payments.
  • Inventory management – Consider revisiting your inventory method. Is first in/first out (FIFO) the right method for your company, or last in/first out (LIFO)?
  • Investments – Whether your investments have performed well or poorly this year, they may benefit you. Underperforming investments or assets may be able to provide losses you can offset against capital gains to lower your tax liability.
  • Research & Development tax credits – Despite changes requiring capitalization of R&D expenses, evaluate any qualifying activities from this year to claim credits.
  • New tax credits – A couple of newer tax incentives can benefit manufacturers in Kansas, Missouri and Arkansas. Section 48D of the CHIPS Act of 2022 established an advanced manufacturing investment credit, which provides a credit of 25% of qualified investment in a facility that manufactures semiconductors or the equipment to manufacture semiconductors. Additionally, Section 45X of the Inflation Reduction Act of 2022 allows for an advanced manufacturing production credit for domestic manufacturing of eligible components, including solar energy, wind energy, inverters, battery components and applicable critical minerals. Additional credits are available for clean energy manufacturing and production, as well.
  • State and local taxes (SALT) – In Kansas, Missouri and Arkansas, owners of businesses that are structured as pass-through entities may make state tax payments at the entity level, rather than on owners’ or partners’ personal tax returns. This qualifies the SALT payments for a full tax deduction on federal returns. These types of laws, enacted by a majority of states, are known as “SALT work-around laws” because they are a response to the $10,000 deductibility limit imposed on SALT payments by the Tax Cuts and Jobs Act of 2017 (TCJA).
  • Accounting methods – Year-end is a great time to review your accounting methods. If your business has grown, it might be beneficial to switch from cash to accrual accounting.
  • Carryforwards – Review any tax credit carryforwards or net operating loss (NOL) carryforwards you may have that can be used to minimize taxes.
  • Review employee benefits and compensation – Recent layoffs at large manufacturers in the region may present opportunities for you to recruit new employees. If you have had a very good year, it may be wise to boost bonuses to attract some of these laid-off workers.
  • Succession planning – While important year-round, year-end is a prime time to turn succession ideas into actionable plans.

If you have not set up a year-end planning meeting, now is the time to do it. Click here to contact an Adams Brown manufacturing tax advisor.