Ready, Set, Manage Your Taxes!

Avoid the last-minute rush with these tax tips from tax experts who work frequently with small to midsize manufacturers.

 

By Bridget McCrea

There are three little letters that, when assembled in just the right order, make most business owners cringe. Precast manufacturers are no exception to the rule. For just about any business owner the mere mention of the word “tax” conjures up bad memories, unmanageable piles of paperwork and the harsh realization that they’re totally unprepared for a looming tax deadline.

The good news is that by implementing a year-round tax strategy, boning up on the new tax laws, keeping a handle on your tax liability and paying attention to deadlines can help ease the burden and make March 15 (for corporations) or April 15 (for sole proprietorships) much less onerous.

Change in the Wind
For precast manufacturers filing their 2003 taxes, the news is especially good. The tax relief bill passed this summer by Congress and signed by President Bush has created a series of tax cuts and amendments that may lessen your 2003 tax burden – that is, if you take a few strategic steps by the end of the year. Namely, that means buying or improving on your capital equipment – something the typical manufacturer is already accustomed to doing on a regular basis anyway.

“The capital-intensive nature of the manufacturing industry puts precasters in a good position this year,” says Paul Cioffari, CPA, vice president and partner with accounting firm Filomeno & Co. in West Hartford, Conn. “Precasters need a lot of equipment and also need to be constantly upgrading and buying equipment to stay current with today’s manufacturing techniques.”

The Jobs and Growth Tax Relief Reconciliation Act of 2003 created two major changes that are particularly good for manufacturers this year. According to the Internal Revenue Service, the special first-year depreciation allowance has been increased from 30 percent to 50 percent for qualified property acquired after May 5, 2003. In addition, the depreciation limit for vehicles subject to the 50 percent allowance was increased by $7,650.

The other key change is the increase in the limit on Section 179 expense deduction to $100,000 for qualified property (the limit is $135,000 for qualified zone property, qualified renewal property or qualified New York Liberty Zone property), according to the IRS. This limit is reduced by the amount by which the cost of section 179 property placed in service during the year exceeds $400,000.

Jeff Callahan, tax partner with public accounting firm Bederson and Co. in West Orange, N.J., says companies can now put into service tangible personal property used in their manufacturing operations – equipment that previously had to be recapitalized, then recaptured via depreciation.

And because tangible property usually has a life of 20 years or less, Callahan says most equipment that a precast manufacturer uses will be eligible for the higher deduction.

“You’ll be able to expense a large amount of 2003’s purchases,” says Callahan. “If a precaster is running a high profit, for example, a few capital equipment purchases before the end of the year will allow them to expense nearly every dollar of it, with certain limitations.”

The manufacturer who is grossing $10 million or $20 million a year in revenue, for example, and who has to wrestle with a $500,000 or $1 million bottom line, Callahan says “can really absorb a lot of that bottom line by these capital improvements or acquisitions.”

Year-End Steps
As 2003 winds down, Callahan cautions manufacturers to keep an eye on inventory and inventory control as a tax planning strategy. “You don’t really want to expend tremendous amounts of inventory through the end of the year, so control your production with your existing inventory,” says Callahan. “This way you’re able to prevent your bottom line from increasing and keep a higher cost of goods sold on your profit/loss statement.”

It’s also time to review your corporate structure, says Mike Noretto, a CPA with accounting and business consulting firm Rea & Associates Inc. in New Philadelphia, Ohio. He says a closely held or family-owned company should consider its current business structure and determine which structure – a C-Corporation, S-Corporation or Limited Liability Company (LLC) – provides the best tax advantages for its situation (see sidebar “Structurally Sound”).

“Each business form has advantages and disadvantages,” Noretto says. “With the passage of the new tax bill and the lowering of tax rates, manufacturers should review their status of operations to determine if an election to another form of business would better suit their current and future tax and business planning strategies.”

Digging deeper into the C-Corporation structure, Noretto also advises manufacturers operating such entities to consider the impact of reduced tax rates on dividends. The new reduction allows companies to structure compensation and dividend packages in new ways that were not previously economically feasible. “The reduced rates on dividends also provides some limited-time opportunities for owners of closely held corporations to transfer ownership in their companies at tax rates much lower than have been available in the past,” Noretto adds.

Strategies for Success
With April just around the corner, Mark Weimer, president of Milwaukee-based Metavante 401(k) Services, which designs and administers retirement plans, says now is the time to fund a retirement plan and get credit for the 2003 tax year.

“As long as the plan is set up by Dec. 31, 2003, it can be funded right up until filing day,” says Weimer, adding that recent changes to the tax laws can help business owners stash away more of their income tax-free money for the future.

Dave Rubenstein, a partner with Chicago law firm Gardner, Carton and Douglas, says by the end of the year all precasters should also review all such retirement and profit-sharing plans to make sure they’re socking the right amount of money away on a tax-deferred or tax-protected basis. Check with your accountant or tax advisor on the deadlines for making such moves, says Rubenstein, as some fall on Dec. 31, 2003, and others on filing day.

Above all, says Rubenstein, manufacturers should also keep good records to ensure that when the March 15, 2004, filing deadline comes they’re not scrambling around trying to justify deductions or costs of goods sold. “It may be perfectly legal to go back and try to reconstruct an entire year, but it may also be virtually impossible,” says Rubenstein. “Instead of dealing with this mad rush, use good record keeping through the entire year and keep in contact with your tax lawyer or accountant so they’re not surprised at the end of the year either.”

Throughout the year, manufacturers should also use tax projections, says Cioffari, so that when it’s time to balance estimated tax payments against the year’s liability, there are no nasty surprises. “Have a professional come in and look at your numbers to estimate your tax for the year,” says Cioffari. “If you’re going to owe any income taxes at all, you want to make sure your taxes are paid so that you’re not penalized.”

And if there’s one constant with taxes, be assured that more changes are probably right around the next corner. “The only thing we know for sure is that Congress will tinker with the tax code in ways that sometimes make sense, and that other times are purely politically motivated,” says Rubenstein. “It’s really just a matter of keeping your eyes open.”