Manufacturing Outlook 2017
Manufacturing financial executives from around the region got a chance to hear from some experts on the economic outlook under the Trump administration and what may lie ahead for area manufacturers in the months to come. Kevin Depew, Director of Thought Leadership for RSM US LLP shared his insights with attendees at a gathering earlier this month hosted by Gilmore Jasion Mahler. Other speakers included Regional Growth Partnership President and CEO Dean Monske as well as Tim Mayle, the Director of Economic Development for the Findlay-Hancock County Alliance. Here's a look at some media coverage of the events, including a TV news story from WTOL and newspaper articles from The Toledo Blade and The Findlay Courier. Gilmore Jasion Mahler hosts Manufacturing Financial Executive Roundtable events three times a year for manufacturing financial executives. The events are held in Findlay and Maumee. Gilmore Jasion Mahler's Manufacturing & Distribution Specialist Team has extensive experience working with area manufacturers. Our quarterly newsletter The Manufacturer also offers timely articles on issues directly impacting the manufacturing industry. Sign up for the newsletter here.
The “manufacturers’ deduction” isn’t just for manufacturers
The Section 199 deduction is intended to encourage domestic manufacturing. In fact, it’s often referred to as the “manufacturers’ deduction.” But this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies.
Sec. 199 deduction 101
The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.
Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible.
The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax.
How income is calculated
To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of domestic production gross receipts (DPGR) exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t — unless less than 5% of receipts aren’t attributable to DPGR.
DPGR can come from a number of activities, including the construction of real property in the United States, as well as engineering or architectural services performed stateside to construct real property. It also can result from the lease, rental, licensing or sale of qualifying production property, such as:
- Tangible personal property (for example, machinery and office equipment),
- Computer software, and
- Master copies of sound recordings.
The property must have been manufactured, produced, grown or extracted in whole or “significantly” within the United States. While each situation is assessed on its merits, the IRS has said that, if the labor and overhead incurred in the United States accounted for at least 20% of the total cost of goods sold, the activity typically qualifies.
Contact your tax advisor to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2016 return.
GJM’s Mike Brough Promoted to Partner
Gilmore Jasion Mahler is pleased to announce that Mike Brough has been promoted to partner with the Firm. Mike joined GJM in January of 2010 as part of our assurance department. He brings over thirteen years of public accounting experience to his client work and has several areas of focus including employee benefit plans. Mike works closely with clients across many industries and is a member of our Manufacturing & Distribution Industry Group.
“Mike’s done an outstanding job working on behalf of our clients,” says Managing Partner Kevin Gilmore. “He’s demonstrated his leadership capabilities and I know he’ll continue to excel in his new role as partner.”
Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers comprehensive financial services including assurance, business advisory, tax, risk advisory and healthcare management. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.
Municipal Tax Reform and Your Business
Businesses in Ohio, and those nearby with operations in the State, are likely all too familiar with the frustrations that can accompany disparities among compliance with the income tax laws of the hundreds of municipalities within the State. When are tax returns due? Are we required to make estimated payments? Does this city allow the carryforward of net operating losses, and if so, for how long? How does that city handle taxation of pass-through entities?
House Bill 5 (H.B. 5), signed into law on December 19, 2014 by Ohio Governor John Kasich, attempts to reform municipal tax law, making it more uniform and less burdensome for taxpayers. Many of the provisions of H.B. 5 were effective January 1, 2016, while others kicked in as of 2017. Several technical corrections to the bill were enacted during the biennial budget bill process, and others may still occur as taxpayers react to the bill’s provisions and how each municipality adopts such provisions.
While interpretation and education of this significant reform is still ongoing, here’s an overview of the key changes businesses should be aware of going into the 2017 filing season and beyond:
- 20-day withholding rule:
- As a general rule, employers do not need to withhold income tax for a municipality if an employee is working 20 or fewer days during the calendar year in that municipality (this is increased from 12 days). Instead, the employer must withhold to the employee’s “principal place of work” municipality (where he/she reports for employment duties on an ordinary basis, whether that is a fixed location, a worksite location, or the location at which he/she spends the greatest number of days in the year).
- Small employer withholding exception:
- A “small employer” (any employer with less than $500,000 of total revenue during the preceding taxable year) only needs to withhold income tax on employees to the municipality (if applicable) in which it has a “fixed location”.
- A “fixed location” must be a permanent place of doing business in Ohio (office, warehouse, store), even if it is in a jurisdiction without a municipal income tax.
- Uniformity of estimate thresholds and due dates:
- H.B. 5 established a standard threshold for the requirement of estimated income tax payments at an annual liability projection exceeding $200. In the past, municipalities were spread across the board regarding this requirement, but most had settled for a lower threshold of $100.
- All city income tax returns for businesses are now due on the 15th day of the fourth month following the end of its taxable year (April 15th for calendar year taxpayers).
- Net operating loss provisions:
- Before H.B. 5, municipalities could choose whether to allow for the carryforward of net operating losses (NOL) and for how long. Now, the bill enforces the application of a five-year NOL carryover period, effective for NOLs incurred in tax years beginning on or after January 1, 2017. Pre-existing NOLs are permitted to continue to be carried forward if allowed by the municipality.
- This NOL carryforward provision will be phased in over a five-year period, with a 50% per year limit beginning in tax year 2018 (any unused NOLs resulting from this 50% limitation may also be carried forward). Full utilization at 100% of NOL carryovers will not occur until tax year 2023.
- Pass-through entity treatment:
- Pass-through entities (S corporations and partnerships) must file and pay municipal tax at the entity level based on apportioned net profits (such entities are no longer able to push tax liabilities down to owners by filing informational only returns with municipalities).
Although the intent of House Bill 5 is uniformity and simplification, it is inevitable that questions and differing interpretations arise, especially as the first filing season of the tax year for which H.B. 5 is effective approaches. Therefore, taxpayers should be sure to consult with a tax advisor to determine the applicability of the H.B. 5 provisions to their specific circumstances and situations.
Jessica Nunn contributed this article, which was also published in the Toledo Business Journal on February 1, 2017 edition. Jessica is a CPA with Gilmore Jasion Mahler, LTD. She is a member of GJM's Manufacturing Industry Group, working with many manufacturing clients as well as clients in many other industries.
The investment interest expense deduction: Less beneficial than you might think
Investment interest — interest on debt used to buy assets held for investment, such as margin debt used to buy securities — generally is deductible for both regular tax and alternative minimum tax purposes. But special rules apply that can make this itemized deduction less beneficial than you might think.
Limits on the deduction
First, you can’t deduct interest you incurred to produce tax-exempt income. For example, if you borrow money to invest in municipal bonds, which are exempt from federal income tax, you can’t deduct the interest.
Second, and perhaps more significant, your investment interest deduction is limited to your net investment income, which, for the purposes of this deduction, generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren’t included.
However, any disallowed interest is carried forward. You can then deduct the disallowed interest in a later year if you have excess net investment income.
Changing the tax treatment
You may elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.
If you’re wondering whether you can claim the investment interest expense deduction on your 2016 return, please contact your tax advisor. We can run the numbers to calculate your potential deduction or to determine whether you could benefit from treating gains or dividends differently to maximize your deduction.
Learn more about GJM’s tax expertise.