Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

Tax tips for manufacturers

- by Alan Duvall 

Published in Dayton Daily News February 5, 2006  

Assuredly America’s manufacturing industry needs all of the help it can get to ward off foreign invaders.  Enter the tax-man who has been forced to engage in a Texas 2-step with Courts to offer them tax aid.  

Federally, the U.S. has historically offered tax incentives with odd acronyms (DISC’s and FSC’s) to manufacturers who exported products.  But the World Trade Organization (WTO) ruled such tax breaks were unfair subsidies in violation of international trade laws.   

So Congress went back to the drawing board.  Stirring their cauldron, legislators conjured up the U.S Production Activities Deduction.   

Beginning in the 2005 tax year, “producers” are bestowed a new deduction which is calculated as three percent (6 percent for 2007, 2008 and 2009, and 9 percent thereafter) of the lesser of net income from the production activity, or net tax income of the taxpayer.  A further limitation of 50 percent of employer W-2 wages (calculated one of three ways) is tossed in. 

Only production activities are eligible for the deduction, so if a company has several divisions net income must be segregated into separate components, a potentially complex analysis. 

What’s a producer?  Clearly manufacturers of products qualify.  Surprisingly, certain real estate contractors, architects and engineers as well as software developers, may also be eligible for the deduction.  It will certainly reap dividends for taxpayers to wriggle their way into the producer category.  To protect its own production base, Ohio traditionally allowed a manufacturing investment tax credit as a business incentive.  Unfortunately, a Federal Appeals Court ruled the credit an unconstitutional violation of the interstate commerce clause.  The case has been appealed to the U.S. Supreme Court. 

Pending appeal, Ohio was deprived of a critical weapon in its battle to attract new business and maintain its manufacturing base.  The legislature then enacted a new manufacturers' grant in its stead.   

The grant is calculated exactly the same as the deposed manufacturers’ credit.   

The only difference?  Instead of receiving state funds in the form of a tax credit – now manufacturers must apply to the State for a monetary grant of the same amount.  Somehow, this distinction is deemed sufficient to avoid Constitutional challenges. 

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.