Costs of running a modern manufacturing company increase constantly. To offset some of those costs by minimizing taxes, Georgia manufacturers must consistently monitor available tax incentives and track qualifying expenditures and hires.
While the 2017 federal tax reform legislation eliminated tax breaks like the Sec. 199 deduction, many mainstream federal and Georgia tax incentives remain available. Here are ten important incentives (four federal, six state) for manufacturing company finance professionals to consider .
Federal Tax Incentives
1) Research tax credit
Qualifying research and development expenses must meet a four-part federal test:
▪ From the outset, the research must be intended to resolve technological uncertainty (which could be as simple as cutting assembly time or as complex as integrating robots).
▪ Research must be technological in nature (i.e. rely on hard science, like engineering or physics).
▪ Its purpose must relate to a new or improved product or process.
▪ Substantially all qualifying activities must involve a process of experimentation to test and evaluate alternatives.
Assuming the expenses pass all four tests, Georgia manufacturers can claim a credit equal to 20% of wages and third-party research payments made, and supplies used, over a base amount that must be calculated. All qualifying R&D activities must be performed on U.S. soil. Research started after commercial production begins, or that involves adaptation or duplication of an existing product or process, does not qualify.
2) Depreciation benefits
Under the 2017 tax act, companies can immediately depreciate machinery, equipment, computers and other business assets with recovery periods of 20 years or fewer using either 100% bonus depreciation or the Sec. 179 deduction.
For bonus deprecation, companies no longer need to be the original user of depreciable equipment, as long as the original buyer is not a related entity. Qualifying assets must be placed in service after Sept. 27, 2017 and before January 2023 to qualify for 100% depreciation. For Sec. 179 expensing, the maximum deduction is now $1 million and the phase-out threshold $2.5 million, vs. $500,000 and $2 million before the tax bill.
Georgia is among the states that add back federal 100% bonus depreciation for state tax purposes, so manufacturers may find it advantageous to opt for Sec. 179 treatment.
3) Foreign-Derived Intangible Income (FDII) deduction
In the 2017 tax overhaul, Congress awarded still another tax incentive to Georgia manufacturers and other U.S. companies that export products or services. Qualifying companies that sell into a foreign market can reduce their effective federal income tax rate on foreign sales from the newly enacted 21% down to 13.125% through the 2025 tax year, and to 16.406% afterward. Special rules govern sales to related parties, however.
4) Work Opportunity Tax Credit (WOTC)
Manufacturers can take a credit for hiring people who have consistently faced significant barriers to employment. Federally designated target groups include qualified veterans, ex-felons and people referred from vocational rehabilitation programs, among others.
Credit amounts vary by target group. For several groups, the WOTC incentive equals 40% of qualified first-year wages paid to an employee who works 400 or more hours.
Georgia Tax Incentives
1) Job tax credit
Manufacturing is among several sectors that Georgia has targeted with this incentive. The credit ranges from $750 to $3,500 per year, over five years, for each qualifying new job added at a company plant or headquarters in Georgia. The amount depends on which of four tier designations is assigned to that Georgia county, and tiers are based on poverty rate, unemployment and per-capita income. At least two and as many as 25 net new jobs (depending on the tier) must have been created. However, companies that expand in designated state opportunity zones qualify for the maximum $3,500 job tax credit, regardless of tier.
Also, your company must pay an average wage that is above the average in the Georgia county with the lowest wages and your company must offer employees health insurance.
Bear in mind: A company cannot take both the Georgia job tax credit and investment tax credits (see 2 below). So, you need to evaluate both tax breaks up front and choose one. As always, it is imperative that you consult your tax professional before making this decision.
2) Investment tax credit
This credit rewards companies making qualified capital investments of $50,000 or more in upgrades or expansions of Georgia plants. Manufacturers must have operated in Georgia for at least three years.
Investment tax credits are calculated using two factors. First, credits are bigger if your production is in a higher tier county. Second, they range from 1% to 5% of investment for general manufacturers but 3% to 8% if you invest in recycling or pollution control equipment or convert a former defense plant to make new products.
3) Retraining tax credit
Georgia manufacturers that undertake employee training programs to enhance product quality or productivity, or to pursue ISO 9000 certification, can help offset those expenses with a retraining credit. Salaries for instructors, teaching materials, employee wages during retraining and reasonable travel expenses count toward the credit. All qualified expenses must be certified by the Technical College System of Georgia.
The credit equals 50% of direct training expenses, up to $500 per employee per program or a maximum $1,250 per employee.
4) Research and development tax credit
Georgia tracks the Internal Revenue Code Section 41 definition of “qualified research expenses” (QREs), except that manufacturers must perform all research in the state. The state credit equals 10% of the excess of QREs over a base figure.
5) Manufacturer’s sales and use tax exemption
Machinery and equipment that are “integral and necessary” to the manufacturing process can be purchased sales tax-free if they are installed in a Georgia plant. Machinery for a new or upgraded plant and replacement machinery all qualify.
In addition, manufacturers avoid sales and use tax on replacement parts, molds and dies, associated tooling, energy used in manufacturing and primary materials-handling equipment, among other purchases for in-state production.
6) Port tax credit bonus
Manufacturers who import materials and components, and/or export finished products, through Georgia’s seaports in Savannah and Brunswick can qualify to fatten their state job or investment tax credits. They must increase shipments through Georgia ports by 10% over either the prior year or a base year that is calculated from companies’ tonnage or number of containers.
If they meet that standard, manufacturers can choose to increase their job tax credit by $1,250 for each qualifying job over five years. Alternatively, they can calculate their investment tax credit as though their plant was situated in a Tier 1 county where state tax breaks are highest.
Evaluating and qualifying for tax incentives is time-intensive, and filing for them can be complex. For assistance with these and other special tax and accounting needs of Georgia manufacturing businesses, contact Kate Maxwell, a member of our manufacturing team, at 404-874-6244.