For those that follow the Podcast or the Blog, I’ve been talking since last summer about a “storm” coming for U.S. Manufacturers. A storm that was going to catapult some, while crippling others. We were right in our prediction, but underestimated just how much this “storm” would affect Manufacturers. Daily I find myself speaking to Manufacturers, all with the same story, and all lacking answers on how to solve it.
Right now the industry is facing the shocking realization of large upcoming tax liabilities, without the capital to pay those liabilities. Even though extensions may be filed and payment arrangements may often be made, this is a slap in the face to business owners. They’ve spent years digging out of a hole, surviving. Just to go back into debt and have this daunting concern hanging over their heads while they should be shifting their focus from survival to growth.
There are 4 Significant Changes That Have Caused This “Perfect Storm”:
- Surprise Profitability
The last several years have been decent if you’re lucky but, dismal for most. This caused most companies to pull back on quarterly tax prepayments, or often eliminate them altogether.
- 2013 Was Better Than Expected
There is no question that 2013 started an upswing that is continuing to get stronger with each passing quarter. Manufacturers not only did not anticipate this upswing, they did not really “feel” it either. For years they were forced to cut back to the essentials just to survive. Once income began to flow again, many were forced to make capital investments that were years overdue. This includes; equipment, staff, software, and facility improvements. This means that although 2013 was in fact more profitable, it wasn’t “felt” by many owners. Not everything may be written off in the current year, even if the bank account hasn’t recovered, the P&L sheets have, and the IRS considers many to be profitable and out of AMT, even if the bank accounts don’t reflect the same.
- Tax Breaks Disappearing
Without Bonus Depreciation, (and other major tax breaks that Manufacturers have not only come to enjoy, but have come to count on), many are finding themselves with unexpected increases to their tax liabilities.
- Tax Rates Increasing
Tax rates are increasing for example; the recent Personal Limit increase to 40% and Capital Gains increasing from 15% – 25%.
So, what happens when companies cut back on paying taxes over the last few years, have a “surprise 2013” that showed up in profit but not necessarily in their bank account and experience tax rate increases, even though tax breaks continue to disappear?
They have a choice, either be crippled or be catapulted. Those that choose to put their head down and re-enter survival mode will surely suffer for it. Those that seek out ways to grow will take over new positions in market share while others scramble to survive.
One key area growing manufacturers are taking a serious look at is what Specialized Tax Incentives are available to offset these increases in Tax Liability. Programs such as the R&D Tax Credit, Cost Segregation, Hiring Incentives, and Property Tax Mitigation. Programs that previously seemed out of reach, all of a sudden are making it to the top of the priority list.