In the spirit of the New Year, here are three tax resolutions to help manufacturing and distribution (M&D) businesses enhance their performance and maximize tax savings.
Resolution #1: Comply With New Affordable Care Act Reporting Requirements and Avoid Penalties
The Affordable Care Act (ACA), also referred to as ObamaCare, mandates comprehensive health insurance reforms and has been one of the more challenging business developments impacting M&D companies in recent years. Under the Employer Shared Responsibility payment and reporting rules, businesses that fail to offer their employees coverage meeting the affordability and minimum value standards must make shared responsibility payments and may be obligated to disclose this liability on their financial statements. In order to collect the data necessary to enforce compliance, new tax information reporting is required for businesses with 50 or more full-time or full-time-equivalent employees, with reporting duties starting in early 2016 for the 2015 calendar year.
Don’t procrastinate when it comes to ACA reporting! Now is the time for businesses to determine which of the information reporting forms (Forms 1094-B, 1095-B, 1094-C and/or 1095-C) are required and get a jump start on gathering the necessary data in order to ensure accurate filing of the forms with the IRS by the February 28, 2016, deadline (or March 31, if filing electronically).
The new health insurance reporting requires businesses to provide a summary statement to their employees, in addition to sending a copy to the IRS. This reporting, similar in some ways to a W-2 or 1099, details the specific coverage periods and the amount of health insurance premiums paid on an employee’s behalf. Employees then use this information to support their individual responsibility payment claims on their personal tax returns.
Resolution #2: Review Accounting Methods for Tax Savings Opportunities and Simplification
Accounting methods affect when various items of income and expense are recognized for tax purposes. The manufacturing and distribution industry has changed significantly over the years, but some companies in the sector have been stagnant with tax accounting methods for many aspects of their evolving businesses.
To start 2016 on the right foot, take a fresh look at how your business and your accounting methods match up. Appropriate choices among permissible accounting methods can reduce current taxes and increase cash flow. Sometimes businesses are using an improper method of accounting and a voluntary change to a proper method is a better result than having the issue discovered during an IRS audit.
Ask yourself this: Is the UNICAP method we adopted many years ago still optimal? Does the calculation still reflect our current business model?
While optimal accounting methods tend to be company-specific, areas for manufacturers to consider reevaluating include revenue recognition, uniform capitalization and accounting for inventories, fixed assets and cost recovery, and the timing of tax deductions, including bad debts, prepaid expenses, repairs and software development costs.
Now is the time to kick off a phased approach to your tax accounting methods. Begin by reviewing the substantial list of opportunities endorsed by the IRS and assessing the feasibility of those possibilities to help you achieve your business objectives. Next, prepare comparisons of your current methods to the optimal methods and estimate the tax savings. Lastly, prepare the calculations and forms required for a change in accounting method and file them with the IRS.
Resolution #3: Review State and Local Tax Filing Requirements
As your business grows and expands, your tax filing requirements may likewise be expanding. A sound business practice and great resolution is to make an annual determination of the jurisdictions where you need to file tax returns for each type of tax (sales, income, franchise, etc.) With state audit activity on the rise, manufacturers would be wise to be proactive now, rather than risk facing repercussions later.
Businesses are required to file in states where they have sufficient business activity to create “nexus” with the state. States are increasingly applying an economic nexus test under the theory that the use of a state’s resources by a business creates nexus — even if the business in question doesn’t have a physical presence in the area. Manufacturers frequently trip up on nexus issues related to out-of-state inventory storage, product delivery or on-site installation and repair services.
Public Law 86-272, also known as the Federal Interstate Income Tax Law, prohibits states from levying income taxes on interstate commerce activity if companies meet certain criteria. While P.L. 86-272 provides a welcome safe harbor, it is limited in that it applies only to income tax and, more specifically, income from the sale of tangible personal property. Some states have a gross receipts tax or franchise taxes that fall outside of the safe harbor. Also, certain activities in a state beyond the narrowly protected activities, such as installation or repairs, could void the safe harbor protection.
On audit, most states require prior year returns and taxes if there was nexus in those years. Often, penalties are assessed for delinquent years. While most states have a statute of limitations on prior year assessments, it doesn’t start running until a return is filed. Should you belatedly determine your company has nexus exposure, some states offer voluntary disclosure and amnesty programs that limit the number of prior year returns required and reduce penalties.
As you gear up for 2016, review your business operations and transactions to assess state tax exposure and filing requirements for recent changes to laws or business activities that might give rise to nexus. Also, if delinquent filing requirements exist, this is your opportunity to get your business back in compliance.
Failure to comply with new reporting and regulatory requirements and utilizing improper accounting methods can lead to significant monetary penalties. The start of a new year is the perfect inspiration for manufacturers to embrace tax planning resolutions-—and stick to them.
Written by Mike Metz for the Winter 2016 BDO Quarterly Insights Newsletter
Mike Metz is the Tax Managing Partner in BDO USA’s Minneapolis office. He can be reached at mmetz[at]bdo.com.