The Impact of Tax Policy & Legislative Action on the Manufacturing SectorThe Impact of Tax Policy & Legislative Action on the Manufacturing Sector
Michael Devereux II, of Wipfli LLP, discusses how pending federal tax hikes in 2026 could affect manufacturers. He is scheduled to speak at the session "Tax Policy & Legislative Insights for the Manufacturing Sector" at MD&M West.
January 21, 2025
.png?width=1280&auto=webp&quality=95&format=jpg&disable=upscale)
At a Glance
- The expiration of TCJA provisions by 2025 could lead to significant tax increases.
- Federal tax hikes for manufacturers in 2026 may be softened by tax credits, incentives, and new accounting methods.
- Key tax incentives for manufacturers include R&D credits, cost segregation studies, and hiring incentives.
Pending federal tax hikes for manufacturers might be partially offset by tax credits and other incentives, according to Michael Devereux II, CPA, CMP, a partner and a manufacturing industry leader at Wipfli LLP, in St. Louis, MO, a CPA and advisory firm whose services include tax planning and compliance, benchmarking, technology consulting, and auditing and accounting.
New accounting methods could also lessen tax liability.
At next month’s MD&M West show in Anaheim, CA, Devereux will speak on “Tax Policy & Legislative Insights for Manufacturing Sector.” He shared some valuable strategies with MD+DI.
How concerning are potential federal tax increases for manufacturers?
Devereux: Absent Congressional action, manufacturers will face a significant tax increase in the tax year 2026, as many of the provisions from the Tax Cuts and Jobs Act (TCJA) of 2017 will expire at the end of 2025.
Many manufacturing companies, especially those in the medical device and diagnostics sector, have already seen tax increases, beginning in tax year 2022, with changes to the treatment of research expenditures, interest expenses, and bonus depreciation.
What can manufacturers do to minimize the impact of any federal tax increase?
Devereux: Exploring tax credits and incentives is a great place to start. Companies can also contact their congressional representatives to show support for extensions of the provisions found in the TCJA.
What tax incentives are available?
Devereux: The federal tax code contains numerous tax credits and incentives. For manufacturers, start-up companies, and the like, I typically see four different areas that have a significant impact on lowering their income tax liability.
The federal R&D tax credit rewards innovation. In order to qualify, though, companies must resolve technological uncertainty in the design or development of a product, process, technique, formula, invention or software application. Eligible expenditures include wages, supplies and materials used in the conduct of research, and outsourced R&D.
Secondly, a cost segregation study allows manufacturers to accelerate their depreciation expenses related to their plant and equipment. Often, we find that 40% to 60% of a plant can qualify for shorter depreciable lives by accelerating deductions into earlier tax years. Also, if the company is making energy-efficient improvements to their building, it could qualify for additional accelerated depreciation.
Thirdly, numerous methods of accounting first became available to middle-market companies with the TCJA. These methods include cash basis, treatment of inventory, and overhead capitalization. We find that companies can frequently change their method of accounting, thus delaying taxable income for future tax years.
Lastly, human capital. Hiring incentives are available to companies that hire employees within specific targeted groups of employees, ranging from $2,400 to $9,600 per new hire, assuming all of the requirements have been met.
In addition to these four federal incentives, numerous states have their own tax incentives that can be extremely valuable.
Any federal tax advice specific to manufacturers of medical devices?
Devereux: The research expense and R&D tax credit are the two most consequential tax benefits for medical device manufacturers. Many invest significantly in R&D, so these companies should evaluate how they are treating these costs, and whether additional benefits could apply to them.
About the Author
You May Also Like