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A Year-End Planning Checklist for Every Manufacturing Company and Distributor

As we approach the end of 2011, here is a list of items to consider as part of your tax year-end planning. 

Inventory Write-off (don’t assume all the reserves are non-deductible)

• It is time to consider looking at those inventory reserve accounts to determine if there are any obsolete items that should be scrapped prior to the end of the year. These inventory items have already been expensed for book purposes. However, the tax laws do not allow for a deduction from taxable income for estimated expenses such as inventory reserves. Therefore, take the time to consider your inventory reserves to gain a tax benefit for 2011. 
• It is a good time to review your LIFO method as it may make sense to change to IPIC (Inventory Price Index Computation). The IPIC method permits taxpayers to use government inflation indexes to calculate inflation for the purposes of valuing LIFO inventories.

Depreciation — Bonus Depreciation and Section 179

• It is time to think about making any big asset purchases that your business may need. The tax laws are changing in 2012 and the 100% bonus depreciation as well as the section 179 deduction is being reduced. The 100% bonus depreciation on new assets purchased and placed in service prior to December 31, 2011 is scheduled to be reduced to 50% on assets placed in service during 2012 and there will not be a bonus deprecation deduction in 2013. In addition, section 179, which allows the 100% expensing of new or used equipment, is set to be reduced from a maximum allowed $500,000 deduction in 2011 to a maximum allowed $125,000 deduction in 2012.

Domestic Production Activities Deduction

• The domestic production activities deduction increased to 9% of qualified production activities income in 2010, up from 6% in 2009. It is time to re-evaluate your production activities to make sure all activities that are eligible for the domestic production activities deduction have been claimed. 

Section 179D

• Have you installed any energy-efficient lighting into your buildings? If so, you may qualify for a deduction allowed in an amount equal to the cost of the energy-efficient commercial building property placed in service during the tax year. The maximum deduction is $1.80 per square foot of the building reduced by any benefits taken under section 179D in previous tax years.

Propane Fuel Credit and Certificate

• Do you have any forklifts or machinery operating on propane gas? If so, you qualify for a 50-cent-per-gallon excise tax credit is allowed for alternative fuels. Propane is one of the fuels that qualify for this credit. In order to claim the credit the alternative-fuel user must be registered. The computation of the credit is based on the number of gallons of propane gas that is purchased during the tax year. The current law allowing the credit is set to expire on December 31, 2011.

Employment Credits

Don’t forget to take advantage of a few employment credits that may be available to you. 

• Hiring Incentives to Restore Employment Act (HIRE Act)
  • The HIRE Act made available up to $1,000 general business credit per employee who meets certain criteria. The employee needs to be hired between February 1, 2010 and January 1, 2011 and was not employed more than 40 hours during the previous 60 days prior to employment. The employee must be retained for at least 52 consecutive weeks. There are additional requirements to be eligible for the credit.
• Work Opportunity Tax Credit (WOTC)
  • The WOTC allows employers of certain targeted groups a credit for employees hired prior to January 1, 2012. The maximum allowed credits vary from $3,000 per employee to $12,000 per employee depending on the employee’s targeted group. The amount of credits varies greatly depending on the employee’s background and the employee’s wages earned.

Look at State Nexus

• Do you have any inventory in a new state? Have you provided services for a new client in a new state? Now is the time to consider looking at filing in states that you may have a filing requirement in other than Illinois especially due to the recent increase in the Illinois tax rates. There may be a possibility to save taxes by filing income tax returns in the states where you have nexus.

Change in Accounting Methods

It is time to consider opportunities to accelerate expenses related to changing an accounting method for tax purposes. 

• Prepaid
  • Prepaid items, such as prepaid insurance or maintenance and service contracts, can be written off in the year of payment instead of capitalizing and amortizing as required for book purposes. In order to meet the requirements to expense these prepaid items, the contract benefits must not exceed 12 months from the first date that the taxpayer received benefits or 12 months after the end of the tax year.
• Inventory 
  • In times of rising inventory costs, it may benefit your business to consider being on the LIFO method. A change from the FIFO method to the LIFO method may result in tax deferral to future years. It is important to consider other issues, not just tax savings. If you decide to file your tax returns using the LIFO method, your company’s books must also be reported under the LIFO method. 

Interest Charge Domestic International Sales Company (IC-DISC)

• It is time to consider whether an IC-DISC would benefit your business. An IC-DISC offers up to a 20% tax break on domestically produced goods for foreign consumption. All direct and indirect foreign sales can be included in the sales qualifying for the potential tax break. 

Michigan Business Tax versus New Michigan Tax (2012)

• Michigan has changed their tax law again. This change becomes effective as of January 1, 2012. The Michigan Business Tax remains in effect for 2011. Now is a good time to review both Michigan activities as well as all state activities to get the maximum benefit from the various state taxing authorities.

If any of these items could help reduce your 2011 taxable income or you have questions and want to know more, your Blackman Kallick tax advisor can answer any questions and evaluate the impact on your business.

 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.