BDO Manufacturing Output Newsletter - Spring 2016

April 2016


Download PDF Version

Table of Contents

Sustainable Manufacturing Credits & Incentives to Know in 2016
Traditional Manufacturing vs. Advanced Manufacturing Infographic
R&D Tax Credit Enhancements Provide More Cash-Saving Opportunities for Manufacturers
A Word from Jay Duke
PErspective in Manufacturing
How Low Can They Go? A Look at How Oil Prices Could Impact Manufacturers
Did You Know...

Sustainable Manufacturing Credits & Incentives to Know in 2016

By Tanya Erbe and John Yoak            
Many states have implemented incentive programs to offset the costs incurred by manufacturers who integrate sustainability initiatives in order to better the communities in which they work, live and play. The nature of these incentive programs varies by state and is generally tailored to a specific environmental issue. For those manufacturers looking to reap the benefits of making 2016 green, the following are a few of the notable credits and incentives that can help soften the financial and tax burden associated with the investment:

California features programs designed to incentivize the development and deployment of manufacturing technologies that will conserve resources, as well as promote economic development and jobs. These programs include a sales and use tax exemption for manufacturers that use science, engineering or information technologies to improve existing materials, or create entirely new materials, products and processes.

California evaluates applicants and their projects on a case-by-case basis, considering several factors including whether the project develops California manufacturing facilities and the extent to which the project will reduce air or water pollution, increase efficiency or reduce consumption beyond what is required by any federal or state law or regulation. At the local level, the city of Santa Rosa offers a water-specific Sustained Reduction Rebate for every 1,000 gallons of sustainable water use and water flow reduction achieved through hardware upgrades or new technologies.

New Jersey has also identified water pollution as an environmental concern that can be addressed through the implementation of a tax credit program. New Jersey taxpayers that purchase equipment used to treat effluent from a primary wastewater treatment facility that would have otherwise been released into New Jersey waters may take a tax credit against their corporation business tax liability, subject to certain limitations and offsets, equal to 50 percent of the cost of the equipment.

Although keeping the waterways clean is paramount, there are numerous other environmental concerns that states can address through credits and incentives. For example, Kentucky and Tennessee offer tax credits to encourage sustainable manufacturing and environmentally friendly business practices. In Kentucky, taxpayers that make capital investments over a certain threshold to construct, retrofit or upgrade certain facilities may claim tax credits against their corporation income tax or their limited liability entity tax. This can be an especially taxpayer-friendly incentive, as the credit amount is equal to 100 percent of the tax attributable to the facility, plus up to 4 percent of the wage assessment against employees whose jobs were created by the facility. Similarly, in Tennessee, a manufacturer that makes capital investments over a certain threshold to construct, expand or remodel a facility engaged in manufacturing a product that is necessary to produce green energy may take a tax credit for certain utility charges.

Other states emphasize the importance of limiting the amount of solid waste produced within their borders. For example, Arkansas encourages its corporate citizens to adopt sustainable manufacturing processes by offering a 30 percent tax credit against corporate income tax for taxpayers that purchase equipment used exclusively within the state for reducing, reusing or recycling solid waste. The credit also applies to the cost of the equipment as well as charges related to installing the equipment at the taxpayer’s facility.

These programs demonstrate a movement among states to continue encouraging investment in and development of sustainable manufacturing practices. The creation of incentive programs and credits at the state and local level, in turn, stimulates good corporate citizenship, from which states, taxpayers and society as a whole can benefit in 2016 and for years to come.

Tanya Erbe is the National Credits and Incentives Leader and may be reached at [email protected].

John Yoak is a tax manager and may be reached at [email protected].



R&D Tax Credit Enhancements Provide More Cash-Saving Opportunities for Manufacturers

By Chai Hoang & Chris Bard

In December 2015, Congress passed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), extending and making permanent a number of important tax credits—including the federal research and development (R&D) credit.

The permanent extension of the R&D credit is great news for both manufacturers and the broader U.S. economy: manufacturers can continue to benefit from their investments to attempt to develop or improve their products, manufacturing processes and software; while the broader economy will benefit from the resulting innovation and boost in productivity.

The PATH Act’s permanent extension is a welcome change for manufacturers who, according to IRS statistics, accounted for more than $6.5 billion of the total $10.8 billion in federal credits claimed by corporations in 2012. Before the PATH Act, the credit would be passed for a year or two and then expire, leaving taxpayers to wonder, often until their tax year was over, whether they’d be allowed to report a credit for the year. Now, they can consider it a permanent component of their tax planning strategies.

Designed to encourage investment in innovation, the R&D tax credit can sometimes be overlooked by manufacturers who often think that “R&D” is a bar too high to meet.

The U.S. Tax Court, however, has said that “routine engineering” and “routine software development” can qualify; and it and other courts have upheld all sorts of efforts to attempt to make things better, faster, cheaper or greener, e.g., specifying and integrating existing components into an overall design for a new system, evaluating the efficiency of a third party’s technology to perform within an existing production process and engaging in scale-up activities to resolve engineering uncertainties not eliminable through testing on smaller processes or equipment.

This is true regardless of what’s being manufactured: paper; food; apparel; chemicals; furniture; plastics—it doesn’t matter. All of these industry subsectors have reported millions of dollars of R&D credits, and they’ve enjoyed the tax savings, reduction in effective tax rates and increase in earnings and cash flows that R&D credits can bring.

And with two other changes to the credit, smaller manufacturers have more opportunities to take advantage as well.

For taxable years beginning after December 31, 2015, eligible small businesses can use research credits to offset Alternative Minimum Tax (AMT). An “eligible small business” is generally a privately held corporation, partnership or sole proprietorship with less than $50 million in average annual gross receipts for the three preceding taxable years. Prior to this change (with one exception in 2010), R&D credits could offset only regular tax liability, rendering them of no value in the current year. With the passage of the PATH Act, though, manufacturing companies and their shareholders may receive cash benefits that had been previously inaccessible due to AMT obligations.

The second change is beneficial for startup manufacturers. It enables qualified small businesses to offset up to $250,000 of their portion of federal payroll taxes for up to five years. A “qualified small business” is generally a corporation, S corporation or partnership that (1) had gross receipts of less than $5 million for the taxable year and (2) did not have gross receipts for any taxable year before the five-taxable-year period ending with the current taxable year. This enhancement can provide cash savings for startups to continue to invest in innovation, hire personnel and finance new technologies—all activities that align with the credit’s original intent.

Now that manufacturers can expect the credit to remain available for years to come, they can more effectively plan their long-term trajectory and make key investments to continue their forward momentum. For those manufacturing companies that have been claiming the R&D credit, now is a great time to make sure nothing is left on the table. Recent changes to what software-development activities qualify have created just one area where re-examination can provide substantial benefits. And for startups and smaller businesses, as we’ve seen, the new credit modifications offer opportunities that didn’t exist previously.

Chai Hoang is a senior associate with BDO’s R&D Tax Services practice for the Northeast U.S. region, and may be reached at [email protected].

Chris Bard is the national leader for BDO’s Specialized Tax Services Research and Development (R&D) practice, and may be reached at [email protected].


A word from Jay Duke…

It is my honor to announce that Rick Schreiber, Memphis Assurance office managing partner and National Leader of the firm’s Manufacturing & Distribution practice, has been elected to the National Association of Manufacturers (NAM) board of directors, effective March 1, 2016. He joins the NAM board to advance a robust, pro-growth manufacturing policy agenda.

As many of you know, the NAM is the largest industrial trade association in the United States with more than 14,000 members and is the nation’s most influential advocate for manufacturing. It is at the forefront of every important policy debate for manufacturers. Executives on the NAM board, which comprises leaders representing companies of all sizes in every industrial sector, are the driving force behind the NAM’s advocacy efforts and work to create a favorable policy climate for manufacturers across the country. Board members provide national and global perspectives on the impact of federal government action on their companies’ ability to grow and prosper. In addition, board members contribute their leadership and expertise to the NAM’s policy-development process.

Not only is this a well-deserved honor for Rick, his appointment to the NAM’s board of directors puts BDO on the map domestically and internationally as an important player in the manufacturing space. In addition to Rick’s election to the board of directors, BDO has a national partnership with the NAM, sponsoring several events across the country in key BDO M&D markets. To read more about the Executive Insights program that BDO sponsors, please click here

Once again, congratulations Rick!

PErspective in Manufacturing

PErspective in Manufacturing is a feature examining private equity investment in the manufacturing industry.

The U.S. plastics industry is enjoying record growth, driven by strong performance in the transportation, healthcare and packaging end markets, as well as persistently low natural gas and oil prices, according to Plastics News. Plastics manufacturing accounts for roughly 5 percent of global oil consumption—and as oil prices drop, so does the cost of plastics manufacturing. A report by the Society of the Plastics Industry (SPI) released in December showed plastics jobs grew from 940,000 in 2014 to 1.7 million in 2015, and shipments rose from a record $427.3 billion in 2014 to an even more impressive $583.7 billion in 2015.

Read Perspective in Manufacturing

How Low Can They Go?

A Look at How Oil Prices Could Impact Manufacturers

It is generally believed that low oil prices are good for business and great for the overall economy. Savings at the pump give consumers greater financial flexibility and can spur increased spending, which ultimately benefits most sectors’ bottom lines. For manufacturers, however, the deflated prices, which are still down nearly 70 percent from a recent peak in June 2014, have spurred nuanced effects. Some manufacturing segments like the automotive industry have benefited, while some, like the machinery sector–reliant on equipment orders from oil and drilling operations–can be financially burdened by the implications of low crude oil prices. At the end of the day, how a company will be impacted largely depends on its product, as well as several other factors. The infographic to the right provides a snapshot on how a few industries could be affected and the overall advantages and drawbacks for the industry as a result of low oil prices.


Did you know...

According to the MPI Internet of Things Study, sponsored by BDO, 64 percent of manufacturers believe IoT will have an impact on their businesses over the next five years.

According to data from payroll processor ADP, manufacturers shed 9,000 jobs in February, marking the first time they’ve cut payrolls since October 2015.

According to a study from the World Economic Forum, plastics use about 6 percent of the world’s oil, with that figure expected to climb to 20 percent by 2050.

Demand for cars and trucks bounced back in February following a chill after the East Coast blizzard in January, according to The Wall Street Journal.

Half of chemical management companies will expand their compliance staff over the next 12 months, while two-thirds plan to do so in five years, according to preliminary survey data by Chemical Watch.

New research from the University of Maryland suggests that manufacturing accounts for approximately one-third of GDP.

For more information on BDO USA's service offerings to this industry, please contact one of the following practice leaders:

Rick Schreiber
Manufacturing & Distribution
Practice Leader


Issy Kotton
Assurance Partner, Los Angeles

Larry Barger
Senior Director, Assurance, Pittsburgh
  Cathy Rozanski McNamara
Assurance Partner, Detroit

Matt Becker 
Tax Partner, Grand Rapids
  Fred Rozelle
Assurance Partner, Detroit


Brian Eccleston 
Assurance Partner, New York


John Tucci
Assurance Partner, Woodbridge


Sean Henaghan
Assurance Partner, Chicago