Now that most states offer a measurable path forward for non-essential businesses to reopen, many owners are wondering if the revenue hits that the shutdown caused may be too much to overcome. Reopening does not guarantee a long-term recovery to prepandemic levels. With this in mind, owners and managers are looking for ways to access cash and limit outlays, to stay viable while their companies search for traction. For all players in the marine industry, immediate cash tax savings are available through three avenues: research and development tax credits, cost segregation studies, and transaction advisory services.
R&D Tax Credit
The R&D tax credit is an excellent tool to accomplish cash goals by recouping current and previous-year expenses for ongoing and completed, qualified R&D projects. Taxpayers of any size that design, develop or improve products or processes are eligible for the credit.
This credit differs from a deduction in that it is an actual dollar-for-dollar offset against taxes owed or paid. While the computation can be complex, most companies receive a credit equal to 9 to 20 percent of total qualifying expenditures. If your company has been engaged in qualifying activities for the past several years, you may be eligible to retroactively claim R&D tax credits.
This is an excellent planning opportunity for companies that had a tax liability in either the current year or in the past three years to generate a refund from the Internal Revenue Service. If your company has been in a net operating loss, there are still opportunities to generate cash flow under certain scenarios, such as payroll offset claims and state refundable credits.
The definition of what qualifies under the R&D tax credit is much broader than most assume. Boat manufacturers, for example, can claim the credit for activities such as a developing a new boat model, experimenting with new lamination schedules, performing center-of-gravity or hydrodynamic studies, or even propeller and engine-height design changes. As the boat market demands higher speeds, more complex features and electronics, and enhanced safety, boat manufacturers must constantly evaluate each model and improve its functionalities and accessories.
Not to be left out, dealer networks and other ancillary marine businesses, such as insurance brokers and financers, might be qualified for the credit based on 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 for this valuable tax-planning tool.
Companies interested in learning more about the R&D tax credit should hire a tax adviser with experience in this specific portion of the Internal Revenue Code. A strong tax adviser will provide not only a calculation of what credit you are owed, but also a report that explains which activities are qualified for the credit, in addition to contemporaneous documentation that further substantiates the activities listed.
Cost Segregation Studies
A second cash tax savings avenue available to marine industry businesses is engaging a CPA firm to perform a cost segregation study. This is a strategic cash tax planning tool that allows property owners to increase cash flow through the acceleration of depreciation deductions and deferral of tax payments. The process involves segregating portions of real property into shorter-lived assets that can be depreciated over much shorter periods.
For example, usually the entire value of a building is depreciated over 39 years. With a cost segregation study, the building is segregated into its individual components, such as HVAC, lighting and other systems, that have a five-, seven- or 15-year life. Any building or building improvement with a cost basis of $500,000 or more that has been acquired in the past 15 years qualifies for a cost segregation study. Accordingly, this planning tool can be implemented on a structure that was constructed or acquired several years earlier, thanks to the IRS catchup provision that offers a taxpayer the opportunity to realize any missed depreciation without having to file an amended tax return.
Additionally, recent tax law changes extended the range of property that qualifies for 100 percent bonus depreciation. That range now includes qualified improvement property, which can generally be thought of as interior renovations or additions to existing real property structures. This new category includes what were generally referred to as leasehold improvement before the law changed.
The ideal time frame in which to conduct a cost segregation analysis is within the same year a building is placed in service, or an existing structure was purchased. In relation to the marine industry, this service can be utilized by manufacturers and dealers owning real property. On average, manufacturing buildings see 30 to 60 percent and warehouses see 10 to 25 percent reclassification of real property as bonus-eligible property. Property that has been reclassified to five-, seven- or 15-year property is eligible for immediate deduction under the bonus depreciation rules.
Transaction Advisory Services
It is impossible to say with complete certainty how demand will return to the widely discretionary marine market, despite the light at the end of the tunnel for businesses becoming operational again. 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 into 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.
It is crucial to take advantage of this time to catch up and plan for an uncertain future. Steps taken now can help ensure that you and your company are in the best possible financial position to come out ahead when the marine industry returns to its previous state of growth. n
Michael C. Laur is a manager for Cherry Bekaert’s Specialty Tax Group, Credits & Accounting Methods, and focuses on providing income tax deductions, credits and innovative solutions to business owners. Based in Fort Lauderdale, Fla., he is passionate about boating and is a member of the Marine Industries Association of South Florida.
Ronald G. Wainwright is the national leader of Cherry Bekaert’s Specialty Tax Group, Credits & Accounting Methods. With more than 25 years of experience in taxation, he serves a diverse client base that includes multinational, public and closely held companies.
This article originally appeared in the June 2020 issue.