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Year-End Tax Planning Guidance

These tips can help employers maximize cash savings, minimize tax exposure and more

The past year has been challenging for the marine industry. Sales peaked for many companies, but production was limited by worker shortages. Businesses that showed signs of real growth were often stymied by supply-chain issues. Mergers and acquisitions abounded amid uncertainty regarding tax legislation.

With the calendar year ending soon, now is the best time to address key tax considerations that can help marine employers generate cash and minimize tax exposure. First, let’s review the ways to maximize cash savings.

Research and Development Tax Credit

The definition of what qualifies under the research and development tax credit is much broader than most assume. Boatbuilders, for example, can claim the credit for activities such as developing a new model, experimenting with new lamination schedules, performing center-of-gravity or hydrodynamic studies, or even working on propeller and engine height design challenges.

This credit also applies for investments in new software. Off-the-shelf software systems are not part of the R&D tax credit, but if a company hires a U.S.-based third party to customize software to better fit its needs, those expenses may generate a credit. If your company has invested in new software for enterprise resource planning, customer management, inventory management or point of sale, you may qualify as well.

The credit is a dollar-for-dollar tax savings incentive that directly reduces a company’s tax liability, with no limitation on the expenses that can be claimed each year. Any unused credit can be carried forward up to 20 years. In addition, previously filed tax returns can typically be amended for up to three years to claim the credit retroactively, allowing employers to recoup previously paid taxes. Most companies receive a credit equal to 9 to 20 percent of total qualifying expenditures. If your company has been in a net operating loss, opportunities still exist to generate cash flow under certain scenarios, such as payroll offset claims and state refundable credits.

Cost Segregation Studies

The second cash tax savings approach available to the marine industry is engaging a CPA firm to perform a cost segregation study. This tool allows property owners to increase cash flow through the acceleration of depreciation deductions and deferral of tax payments. A study identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, a strategy that reduces current income tax obligations.

Personal property assets include a building’s nonstructural elements, exterior land improvements and indirect construction costs. The primary goal is to identify all construction-related costs that can be depreciated over a shorter tax life (typically five, seven and 15 years) than the building (39 years for non-residential real property). Additionally, recent tax law changes under the Tax Cuts and Jobs Act have given a boost to cost segregation. Bonus depreciation was increased from 50 to 100 percent on certain qualifying assets.

Next, consider these options for expanding your business.

State Hiring Credits

Nearly every state offers employers tax incentives focused on job creation and on ensuring that businesses within the state remain successful and competitive. These tax credits encourage employers to create jobs, expand existing payrolls or retrain current employees for new roles. These incentives are collectively known as state hiring credits.

For example, businesses in Georgia can take advantage of multiple job creation tax credits that provide as much as $5,000 in annual tax savings per job for up to five years. After offsetting corporate income tax liability, excess tax credits can also offset a company’s payroll withholding.

Furthermore, many states offer “piggyback” credits for the federal Work Opportunity Tax Credit. Qualifying for the WOTC can earn an employer double benefits: one federal credit and one state credit. The WOTC is designed for employers that hire individuals from target groups of Americans who have historically faced higher rates of unemployment, such as veterans, previously incarcerated people, the long-term unemployed, summer youth and individuals receiving assistance from certain federal programs.

Headquarters Credit

Headquarters tend to have higher-paying jobs, and the location often means the state can impose sales tax. To offset this tax burden, some states offer generous incentives for locating your headquarters in their state. A headquarters usually means an office where managerial and other core functions (such as financial, legal and personnel) are performed. Credits can reduce your income or sales tax payments, or be paid directly to your business as a refundable credit. For example, Mississippi’s Headquarters Credit equals $500 to $2,000 per job position in the state, an amount that reduces state income tax of the business.

Opportunity Zones

Opportunity zones are geography-based tax incentives. The Opportunity Zones program, part of the Tax Cuts and Jobs Act, provides an option for investors to profit and spur investment in undercapitalized communities.

Locating operations within an Opportunity Zone can provide three tax benefits: delaying payment of capital gains tax on gains invested into an Opportunity Zone until the end of 2026 or upon earlier sale of qualified assets; reducing capital gains for Opportunity Zone assets purchased by Dec. 31; and voiding capital gains for investments held at least 10 years in Opportunity Funds (the investment vehicle that invests in Opportunity Zones).

Planning for Mergers and Acquisitions

Transaction advisory services are available to ensure that business sellers receive maximum value for their companies. Their offerings include financial services, valuation services, buy and sell side due diligence, and IT due diligence services. Even though most deals are on hold, the financial due diligence process can be lengthy; therefore, it is important to start the conversation with your CPA at least six months before entering a potential transaction.

For owners considering selling, now is the time to make sure current financials and past earning reports are up-to-date and as detailed as possible to ease the burden of due diligence once the selling process begins. A CPA with experience in buy or sell side due diligence is critical to ensure a fair asking price, and to make sure the closing process is as smooth as possible. Below are three steps that will make sure you get the best offer for your business and reduce the risk of surprises during the due diligence process, thereby paving the way to a successful exit.

First, seek ways to improve the return on invested capital. Working on the following value drivers will help you improve the use of your invested capital to generate increased cash flows: strategic position (take steps to improve your competitive stance in the market relative to your peers); customer base (build a base that appreciates the value your company provides and is willing to pay for it, because a strong customer base equates to quality future cash flows); cost structure and scalability (find ways to allow revenues to grow faster than the cost associated with that growth); and working capital (improve your working capital cycle, or how long it takes a dollar spent to convert to a dollar collected, because the shorter this period, the less capital is needed to fund your operating cycle).

Reduce risk to make yours a more transferable business. This should result in a lower cost of capital and a rate of return a buyer would seek, thereby increasing the value of your company. And third, ensure that your structure will help you achieve maximum after-tax proceeds, and if there are multiple owners, have a formal agreement that provides for drag-along rights of minority shareholders. We covered this in-depth in this magazine earlier this year. (Search the archives at tradeonlytoday.com).

Tax planning does not stop Dec. 31, especially this year, with so many tax legislation changes. Continually monitor your company’s financial obligations and be prepared to adjust strategies and redirect focus to take accelerated expense deductions and defer revenue. Consult with your tax adviser or contact the Cherry Bekaert’s Credits and Accounting Methods Practice. 

John Anderson, Zachary Mays and Ronald G. Wainwright are associates, managers and leaders at Cherry Bekaert’s Specialty Tax Group, with expertise in income tax deductions and more for multinational, public and closely held companies.

This article was originally published in the December 2021 issue.

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