Tax Savings & Pitfalls for Manufacturers

Presented by: WIRE-Net

State and Local Tax Planning Ideas

Chad A. Bice, CPA

50% Small Business Income Deduction

Effective 1/1/13:

Individual taxpayers filing the IT1040 are allowed a deduction equal to 50% of the taxpayer’s Ohio small business income up to $250,000 ($62,500 MFS & $125,000 MFJ).

Ohio small business investor income means the portion of a taxpayer’s adjusted gross income that is business income apportioned or allocated to Ohio.

• Schedule C Income

• Schedule E Income from S Corporations, partnerships and rentals.

• Schedule F

City Income Tax Apportionment Savings

Taxable Income is generally apportioned to Ohio cities based on a 3 factor formula: Property, Payroll and Sales

Apportionment Example:

• 100/100 Property

• 90/100 Payroll

• 100/100 Sales

– 290/3 = 96.67% of taxable income apportioned to City Potential to reduce sales factor

• Sales of tangible personal property that are regularly solicited at the customer’s place of business outside the filing city should NOT be included in the numerator of the sales factor.

Ohio Use Tax - Are you one of the 300,000+ Companies without an account?

What is use tax?When no sales tax is charged on taxable goods or

services• Internet purchases

• Out of state purchases

• In state purchases

Increase in use tax audits

Sales tax is charged on the front-end by the seller.

Use tax is due on the back-end by the purchaser, when the sales tax collection process breaks down.

Ohio CAT Tax - Simple Right?

The Commercial Activities Tax (CAT) sounds simple but:

Are you sourcing your sales correctly?

• Ohio vs. Non Ohio sourced sales?

Are you filing correctly / most advantageously?

• Separate

• Combined

• Consolidated

You might want to review your filing status and sourcing technique

State Nexus – Are you exposed?

Are you filing in multiple states?

Income/Franchise Tax

Sales/Use Tax

Gross Margins Tax

Gross Receipts Tax

If not, do you know if you have nexus?

A minimum connection between your business and the taxing jurisdiction that gives that jurisdiction the right to subject your company to tax.

Physical Presence (Quill) – Sales Tax

Public Law 86-272 – solicitation of tangible personal property

Economic Presence

Aggressive States

Do you have exposure? Is a Nexus Study in order?

Ohio Sales/Use Tax - Manufacturing Exemption

Basic Rule - Exemption applies to raw materials to be incorporated into a manufactured good and things directly used in the manufacturing process.

Requires a state change of the property being changed.

Exemption extends from first change to last change.

Items before the beginning of the mfg. process, after the end, or not directly related are not part of the mfg. exemption.

When does the mfg. process start?

Begins when the raw materials or parts are “committed” to the manufacturing process. This commitment doesn’t have to be irrevocable, but they must have reached the point, after materials handling from initial storage has ceased, where they normally will be utilized within a short period of time.

If the raw materials or parts are stored after being received at the manufacturing facility, the raw materials or parts are not committed until after they are removed from initial storage and where the materials or parts have been mixed, measured, blended, heated, cleaned, or otherwise treated or prepared for the manufacturing process, whichever first occurs.

Why is this important?

Things used in any activity, including movement or storage of the materials or parts before they are committed to the manufacturing process are taxable.

Items such as forklifts, shrink wrap, shrink wrap machinery, pallets, shelving, tags, cranes/lifts/pulleys, tables/platforms, tooling, conveyors, boxes, containers, transport to or from storage, etc. are taxable if used before the manufacturing process begins.

When does the manufacturing process end?

When a manufactured item is completed.

When its in the form and condition as it will be sold by the manufacturer. When all processes that change or alter its state or form or enhance its value are finished, even though the item subsequently will be tested to ensure its quality or be packaged for storage or shipment.

If the product will be further manufactured by the same manufacturer at a different manufacturing facility, the product is still in-process and is not completed.

Can be numerous manufacturing processes in same plant, look for completed saleable products.

Why is this important?

Establishes the manufacturing cycle.

Within the cycle, production machinery, materials handling equipment that moves the product between the production machines, and any equipment, such as tanks, shelves, or racks, that temporarily store or hold the product in between production machines are exempt.

Items after manufacturing and before packaging are outside of the exemption, and may be taxable of no other exemption applies.

Exempt - Machinery and consumables

Production machinery (actually touches the product).

Blending, mixing, measuring, washing, agitating, filtering, heating, cooling, or similar processes.

Consumables - Catalysts, solvents, water, acids, oil, and similar consumables that interact with (but not become part of) the product and that are an integral part of the manufacturing operation.

Exempt – Transport (while in mfg. process)

Materials handling equipment that moves the product through a continuous manufacturing operation or that temporarily stores the product during the manufacturing operation.

Note: Motor vehicles licensed to operate on public highways are outside of the exemption however.

Temporary Storage – looking for items that serve as a placeholder only. Holding for the next machine in the process in line is ok, waiting for a month (which is not needed for curing or the like) is too long – that’s regular storage and is taxable.

Exempt - Power

The power itself, the generation or extraction of the power, and anything used to get the power there, are exempt.

Electricity, coke, gas, water, steam, and similar substances.

Producing or extracting those substances.

Machinery, equipment, and other tangible personal property used to treat, filter, pump, alter voltage, or otherwise make the substance suitable for use in the manufacturing operation.

Wiring to get power to the machines on the mfg. floor or to the facility.

Exempt - Reclamation

Machinery, equipment, and other tangible personal property that treats, filters, cools, refines, or otherwise renders water, steam, acid, oil, solvents, or similar substances used in the manufacturing operation reusable, provided that the substances are intended for reuse and not for disposal, sale, or transportation from the manufacturing facility.

It has to be the same manufacturing facility….moving things from one building to another doesn’t count.

Exempt - Parts, repairs, and installation

Parts, components, and repair and installation services for items used in the manufacturing process are exempt.

Replacement parts for nontaxable equipment are not taxable.

Any repair service or installation service purchased from an independent contractor for repairing or installing nontaxable equipment is not taxable.

Monitoring items that display conditions of/in the machinery are exempt. Recordkeeping devices are taxable.

Exempt - Repair/Remanufacturer of items used in manufacturing

Machinery, equipment, fuel, power, material, parts, and other tangible personal property used to manufacture machinery, equipment, or other tangible personal property that itself will be used in manufacturing.

Creation of tooling, replacement parts, metal pallets, or consumables (acid).

This is a separate manufacturing process.

Machines used to sharpen blades or other tooling

What is not included in the exemption?

Items used for:

Administration

Personnel

Security – including monitoring devices to observe personnel

Inventory Control

Recordkeeping – testing?

Ordering/Billing

Waste collection handling (but see reuse and environmental)

What is not included in the exemption?

Items used for:

Storage of raw materials or finished products

Storage of fuel, water, solvents, etc.. to be used in manufacturing

Storage lockers for clothes, tools, etc..

What is not included in the exemption?

Items used for:

Transport of items that are not between steps in a continuous manufacturing operation

Tangible property to be incorporated into realty (business fixtures are not incorporated into realty)

General environment control or monitoring (temperature, dust collection, lighting, etc..) except in special limited areas where such control is essential for production to occur).

• Note that keeping things from entering the exterior environment is a separate exemption.

What is not included in the exemption?

Items used for:

Safety equipment for workers, unless it is integrated into machinery (eyeglasses, gloves, earplugs, first aid supplies, fire extinguishers, etc..)

Research and Development (there is a separate exemption for this)

Vehicles that are registered for operation on highways.

Questions?

Contact Information

Chad A. Bice, CPA – Tax Director, Director, State & Local Tax.

Direct Dial: 740-454-3198

chad.bice@reacpa.com

Christopher Axene, CPA –Federal Tax Planning

Direct Dial: 614-923-6558

chris.axene@reacpa.com

Questions?