6 Tax Credits for Manufacturing Businesses in Wisconsin
Navigating the tidal wave of inflation can be hard, especially for manufacturing startups that have just begun to take root pre-pandemic. Further, for small businesses, a price hike is always a last resort as the results it can reap for your financial stability greatly depend on the purchasing power of the community you’re currently holding business in.
Before you get swept up in the rising costs of production, it is important to first identify areas for savings. One potential saving you can always turn to is on your taxes. Two come into mind in relation to this: tax credits and tax write-offs.
Both tax credits and tax write-offs or deductions are tax avoidance measures. The difference lies in how each factor in, in the computation of your taxes.
Tax write-offs differ from tax credits in that, the former reduce your tax base to arrive at a lower tax liability while the latter directly diminishes your tax liability.
Tax deductions are usually items embedded in your operational expenses like self-rental, advertising, parking fees and tolls, and business mileage. Chances are, you’d already accounted for these during tax preparation.
In contrast, if you haven’t been keeping up with tax laws and updates, you may have missed tax credits that are available to you. Luckily, our business tax advisors have put together a list of six tax credits which manufacturing businesses in Wisconsin can take advantage of.
The Work Opportunity Tax Credit is a federal tax credit that is available to businesses, including manufacturers, who hire certain individuals that have faced hardship finding employment.
The WOTC applies to wages of individuals within the targeted groups who are hired on or before December 31, 2025, as extended by the Consolidated Appropriations Act.
The targeted groups include qualified veterans, vocational rehabilitation referrals, which are essentially individuals that have physical or mental disabilities that were referred to the manufacturer, a summer youth employee, and ex-felons, among others.
Employers of all sizes can claim the credit. Credit is calculated by claiming up to 40% of the first $6,000 in wages that employees earn in their first year of work and is capped at $2,400 for each employee. The employee must have been employed at least 400 hours during their first year. Only 25% of the employee’s first $6,000 in wages can be claimed if they were employed less than 400 but more than 120 hours. Different rules apply to other targeted groups.
The Research and Development Tax Credit is a federal tax credit that provides a dollar-for-dollar cash savings for the qualifying expenses incurred in enhancing manufacturing performance. Manufacturers can qualify if they are attempting to improve a manufacturing process or product it produces.
Different activities qualify for the credit, such as designing and developing custom tooling used in the manufacturing process, developing new processes to increase overall performance, improving the current process to meet new federal and state standards, and developing new techniques to increase performance, among others. Manufacturers can also use the credit against $250,000 of payroll taxes.
The Jobs Tax Credit is a Wisconsin credit that is based on wages that are paid to eligible employees, and the costs that are incurred to train them. The credit is income and should be reported on the business return for the year received. The credit is awarded by the Wisconsin Economic Development Corporation. A notice will be issued by the WEDC for all eligible benefits that are awarded.
The Employee Retention Credit is a refundable tax credit on qualified wages and was used to help businesses like manufacturers that experienced government shutdowns or had a reduction in gross receipts. It was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and was terminated with the passage of the Infrastructure Investment and Jobs Act.
Manufacturers could be eligible for the credit if sales declined by more than 20% by quarter in 2021, compared to 2019. The credit is based on 70% of the wages paid during the first two quarters of 2021, and there is a limit of $10,000 in wages, per employee, for each eligible quarter.
If you are an eligible business that paid qualified wages from March 13, 2020 to September 30, 2021 (December 31, 2021 for Recovery Startup Businesses), and you haven’t filed your claims yet, you can retroactively file your claims within three years from the ERC program’s termination.
The Wisconsin Manufacturing and Agricultural Credit is available to all businesses involved in manufacturing activities for the taxable years that begin on or after January 1, 2013. The credit is calculated by multiplying the income earned from qualified production activities by 7.5%.
It is a non-refundable credit and can be carried forward for 15 years. For each year that the credit is taken, it must be reported as income on the following year’s tax return and must be claimed within four years from the due date of the filing of such return.
The Business Development Tax Credit Program grants tax credits to an eligible business located in or relocating to Wisconsin, if your business’ net employment in Wisconsin increases for every year you claim such credit, compared to the year before your business was certified by the Wisconsin Economic Development Corporation (WEDC).
The tax credits available under this program are:
- Up to 10% of annual wages paid to eligible employees earning at least 150% of federal minimum wage;
- Up to 50% of eligible training costs;
- Up to 3% of capital investment in business personal property, or up to 5% of eligible capital investment in real property; and
- Up to 10% of annual wages of positions created or retained at corporate headquarters facility.
Other Special Tax Benefits for Manufacturers:
- Wisconsin Sales Tax Exempt Form for Manufacturers:
The Wisconsin sales and use tax exemption certificate can be used to provide an exemption for manufacturers on paying sales tax on fixed assets that are purchased and used in the production of qualifying products.
- Section 179:
The Section 179 deduction is a depreciation deduction meant to incentivize smaller sized companies to invest in themselves. The deduction allows for the first $1,080,000 (increased by $30,000 from 2021) of section 179 property acquired and put in service during the operating year in which deduction is claimed.
A company can purchase up to $2,700,000 worth of eligible equipment before the deduction begins to phase out. Total phase out occurs when $3,780,000 is purchased and put into service by December 31, 2022.
But I’ve Already Filed My Tax Return…
You don’t have to worry if you’ve already filed your tax return and missed any of these tax credits or benefits. You can still file an amended return using IRS Form 1040-X within:
- Three years from the filing of your original return, or
- Two years after the date you paid your tax, whichever is later.
Please note that if you filed your original return after the deadline due to the grant of an extension of time to file, your three-year period will run from the actual date of filing.
Consult a tax professional if you have any questions or concerns. They can help you ensure that you are taking advantage of all the tax credits available to you. At MBE CPAs, we have business tax advisors who can guide you through the process and help you save thousands of dollars. Talk to us today!