As the year wraps up, manufacturers still have a chance to deploy tax planning strategies to reduce their 2024 tax liability. The Tax Cuts and Jobs Act (TCJA) continues to offer significant tax savings, and newer provisions from the Inflation Reduction Act (IRA) and the CHIPS Act also introduce additional tax-saving opportunities for year-end planning.
Maximize Your Section 179 Expensing Election
Manufacturers have benefited from TCJA changes to depreciation, particularly with the increased Section 179 expensing election limits. In 2024, the maximum deduction is $1.22 million, with phaseouts beginning when total purchases exceed $3.05 million.
If you haven’t utilized the full Sec. 179 deduction yet, you can reduce your 2024 tax bill by acquiring and placing eligible new or used assets into service before the year ends. Eligible purchases include machinery, equipment, furniture, software, and certain business vehicles. You can also expense qualified improvement property, such as interior upgrades and improvements to roofs, HVAC, and security systems.
However, the Sec. 179 election is limited to business income, meaning any excess can be carried forward or deducted as bonus depreciation, which isn’t subject to phaseouts or dollar limits.
Bonus Depreciation – Take Action Before it Phases Out
Bonus depreciation is decreasing each year, with first-year bonus depreciation dropping to 60% in 2024, down from 100%. Under the TCJA, it will continue to decline by 20% annually until 2027 unless Congress intervenes.
If you’re planning to make qualifying purchases in 2025, expedite those purchases to 2024 to capture a larger deduction. Eligible property includes assets like machinery, equipment, vehicles, and office furniture with a lifespan of 20 years or less.
Keep in mind, though, that accelerated depreciation may not always be the best choice, especially if you’re anticipating a higher tax bracket in the future or if it reduces the benefits of other tax breaks, such as the Sec. 199A deduction for qualified business income (QBI), which expires in 2025.
Leverage the Research Credit
The TCJA also provided benefits to manufacturers through changes to research and development (R&D) cost treatment. Manufacturers can now claim the full research credit for direct R&D costs and deduct research and experimentation costs under Sec. 174. However, you cannot claim both the credit and deduction for the same expense.
The research credit is a valuable incentive for manufacturers developing new or improved products or processes. It can also offset some of the tax liability caused by the TCJA’s requirement to amortize Sec. 174 costs over five years (or 15 years for foreign expenses). Now is the time to evaluate any qualified research expenditures you may have had in 2024.
Take Advantage of New Incentives
The IRA and CHIPS Act introduce tax incentives for manufacturers, including the Sec. 48D advanced manufacturing investment credit. This credit offers 25% of qualifying investments in semiconductor manufacturing facilities or equipment used to make semiconductors. You can claim this credit for 2024 by placing qualified property into service before year-end.
Additionally, the Sec. 45X advanced manufacturing production credit applies to U.S.-produced solar and wind energy components, inverters, battery components, and critical minerals. The credit amount depends on the amount of eligible components produced during the tax year, making it essential to ramp up production before year-end. Note that this credit begins phasing out in 2030.
Take Action Now
To maximize your tax savings for 2024, it’s crucial to act swiftly. If you have questions about year-end tax planning, feel free to contact us for expert guidance.
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