Although we’re several weeks into the new year, many of us are still in the process of recovering from 2020—picking ourselves up, dusting ourselves off, and trying to get our bearings before dealing with 2021. A global pandemic, a hard-fought election, a drawn-out postelection phase, and anticipation of a new presidential administration combined to make 2020 one of the most chaotic years in recent history.
While 2021 is sure to be a big improvement over 2020, the presidential election has not made the future much clearer for manufacturing and other industries, which makes planning for 2021 difficult. Although President Biden proposed several ideas for the manufacturing industry in general, including a tax credit aimed at keeping operations here in the U.S., time will tell if he is able to usher his proposals through Congress. One of them is a significant increase in the corporate tax rate.
Some of the informed voices in Washington, D.C., have provided some key insights. It’s certain that the pandemic will be the first priority for the new administration, and that is likely to be followed by infrastructure enhancements. Taxes are perhaps the third item on the list.
That is why, setting aside any pandemic relief that comes to fruition, cash flow planning is going to be a primary concern among businesses of all sorts early in the year. Many corporations are deferring income, but there are other powerful options out there to increase cash flow. These time-tested programs can be just as valuable, if not more so, than programs developed to deal with the fallout of the pandemic like the Paycheck Protection Program (PPP).
The best time to discuss these programs with your accountant is now. If you delay much past the end of February, the year will be well underway before you put a plan into place.
Looking at the numbers, despite the fact that the industry’s overall productivity contracted in the initial months of the pandemic—the PMI fell to 48.5 in March from 50.7 in February— U.S. manufacturing has shown both resilience and the ability to adapt to shifting consumer needs. For example, the Department of Energy’s Manufacturing Demonstration Facility and Carbon Fiber Technology Facility at Oak Ridge National Laboratory used their “materials science, fiber production, and additive manufacturing expertise and capabilities to produce tooling such as custom molds for injection molding to provide U.S. industry with the necessary resources to mass produce health care supplies in record time,” according to the ORNL website.
Get Credit for R&D
For fabricators, Section 41 is the largest federal credit available. In fact, on average it is worth five times what the PPP is worth. It comes with few strings attached—it doesn’t need to be paid back and it comes with no restrictions on how to use the funds. The credit, also known as the Research and Development Tax Credit, enjoys bipartisan support in Congress and is also considered to be an economic recovery tool by several members of Congress who have suggested doubling it.
Manufacturers can claim the credit as long as they are working to improve efficiency or yield with any product or process. For instance, fabricators are eligible for the Section 41 credit if they are developing second-generation or improved products; helping customers redesign components to make them less expensive to produce; or improving in-house processes for making a component or an assembly. Based on the work metal fabricators do every day, many are more than qualified for this federal incentive.
Of course, each business has its own opportunities to undertake research and development activities, so the amounts that can be claimed vary, but this shouldn’t deter you from making the effort. It’s unlikely that the federal government will offer a larger tax credit or incentive even after the next relief package is passed.
Defer Social Security Taxes
The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows employers to defer paying their part of Social Security taxes through the end of 2020.
The first half of the deferred amount is due Dec. 31, 2021, and the remaining amount is due Dec. 31, 2022. This strategy offers immediate liquidity to businesses in need. Even if you neglected to opt for this by the end of the year, it is still worth discussing with your CPA, as certain accounting methods may make it possible to pay the taxes as late as August 2021 and still claim the deduction for 2020.
Claim Disaster Losses for Refunds in the Short Term
Another tax strategy to consider with your company’s tax professionals is claiming disaster losses from 2020. Certain losses caused by a disaster can be claimed on a prior year’s tax return. This can allow businesses affected by a disruption, such as the coronavirus pandemic, to receive refunds quicker to mitigate damage.
The previous administration declared all 50 states as disaster areas, meaning every U.S. business might be eligible to claim refunds for certain types of losses due to COVID-19. As an example, if a fabrication firm suffered losses due to halted operations in the face of the pandemic, it might be able to claim those losses on an amended 2019 return.
Receive Quick Refunds from Current Losses
Another provision from the CARES Act that might be useful allows businesses to use current losses against past income to claim refunds immediately. It allows a five-year carry back for net operating losses that arose in 2018, 2019, and 2020 for refunds against earlier returns. If your company dealt with losses, your business might be able to benefit from this provision.
About the Author
Neil Shah is a Technical Director at alliantgroup, specializing in the architecture & engineering, construction/contracting and manufacturing industries. An engineer by trade, he has worked for a prestigious architecture & engineering firm, as well as a Fortune 500 software and technology company. In his role at alliantgroup, Neil has worked with hundreds of small to mid-sized businesses and has helped claim over $250 million in credits and incentives.