Manufacturing Archives - MGO CPA | Tax, Audit, and Consulting Services

8 Strategies to Reduce Your Manufacturing Property Tax Burdens

Key Takeaways:

Regularly assess property values to find and appeal over-assessments, reducing manufacturing tax burdens.

Leverage tax incentives and exemptions for manufacturing to lower property tax liabilities.

Maintain accurate asset records and consult manufacturing tax professionals for effective tax management.

While manufacturing and distribution companies face many challenges, one significant area of concern is property taxes. These taxes can be a substantial expense, affecting overall profitability. If you are looking to improve the financial performance of your manufacturing company, implementing effective strategies to manage and reduce property tax burdens could be beneficial.

Here are eight key strategies to help your manufacturing business lower its property tax liabilities:

1. Conduct Regular Property Assessments

One of the most effective ways to manage property taxes is through regular reviews of your property tax statements. Your company should conduct detailed evaluations of the property values listed on its county property tax statements to make certain you are not being over-assessed on abandoned, sold, or underused properties. Assess whether your fixed assets software is robust enough to capture depreciable assets purchased, sold, abandoned, and fully depreciated but still in use. Are depreciable asset classes appropriately identified?

Engage with professional appraisers who specialize in industrial properties to get correct valuations. This process can find discrepancies and provide a basis for appealing inflated assessments. Schedule regular property reviews annually or biannually, depending on the additions and deletions to your business’s depreciation schedule. Periodically reassess your business real estate values based on the volatility of property values in your area.

It is also beneficial to understand the real property assessment methodology used by local authorities, as this can help in finding any systematic overvaluations or errors. Is it at market value, a percentage of fair market value, comparable properties values, or highest and best use?

2. Appeal Unfair Assessments

Be diligent in preparing your business property declaration. It will be the basis for your business assessment notice. If it appears inaccurate, filing a timely appeal can lead to significant tax savings — not only for the current year but, more importantly, for future years as well. Each district has its own separate procedures for real and personal property appeals, typically requiring substantial evidence to support claims of overvaluation. Compiling comprehensive documentation — including recent appraisals, comparable property values, and evidence of any property issues — can strengthen your case for a reduction.

The appeal process can be complex, often involving strict deadlines and specific forms. Consulting with an attorney or tax advisor with experience in property tax appeals can help you navigate this process. Keeping a detailed timeline and records of all communications with tax authorities can also be beneficial during the appeal.

3. Leverage Tax Incentives and Exemptions

Many state and local governments offer tax incentives, sales tax exemptions, and property tax abatements for certain industries and property types. Examples of such incentives include enterprise zone credits — which provide tax benefits for businesses working in economically distressed areas — and investment tax credits for the purchase of new machinery, equipment, and parts.

Additionally, some authorities offer pollution control exemptions for equipment that reduces environmental impact. Researching and applying for these and other tax credits and incentives can lead to significant tax savings.

4. Keep Accurate Asset Records

Accurate and up-to-date asset records are crucial for effective property tax management. Document all machinery, equipment, and property improvements — noting purchase dates, costs, and any depreciation. These fixed asset records must be tied to the annual property tax filing declaration statements before assessment notices are issued. Correct and accurate declarations prevent over-assessments and can help you avoid appeals.

Adopting a comprehensive asset management system and utilizing an appropriate software package can simplify this process. These systems can check the lifecycle of each asset — including maintenance and upgrades — which can influence its value. Regular audits of these records can confirm that they are accurate and up to date, preventing discrepancies that could result in higher tax assessments.

5. Improve Property Use and Zoning

Reviewing and refining the use of your property can also lead to tax savings. Sometimes, reconfiguring the layout or usage of space can qualify for lower tax rates. Additionally, understanding zoning regulations and looking for rezoning where beneficial can result in lower tax obligations. Consulting with zoning professionals and local authorities can provide insights into potential savings.

For instance, converting unused or underutilized space into areas that qualify for lower tax rates — such as storage or non-commercial use — can reduce tax liabilities. Additionally, exploring opportunities for mixed-use zoning, which can offer tax benefits, might be worth considering.

6. Engage with Local Tax Authorities

Building a relationship with local tax authorities can be helpful. Regular communication and collaboration can lead to a better understanding of the tax landscape and potential changes that could affect assessments. Being proactive and transparent with local authorities can also help you negotiate favorable terms or resolve disputes amicably.

Attending local tax board meetings and staying informed about upcoming changes in tax regulations can give you a competitive edge. Providing a direct line of communication with key officials can facilitate smoother negotiations and quicker resolutions of any issues that may arise.

7. Invest in Tax-Effective Property Improvements

When planning property improvements, consider the tax implications. Investing in enhancements that qualify for tax credits or abatements can offset some of the costs. Additionally, improvements that increase energy efficiency and/or lighting use or sustainability may be eligible for specific incentives, further reducing your tax burden.

For example, installing solar panels or energy-efficient HVAC systems can qualify for green energy tax credits. Improvements that align with local or federal sustainability goals can also attract added incentives, making the first investment more cost-effective over time.

8. Work with Tax Professionals

Navigating the complexities of property taxes requires specialized knowledge. Working with tax professionals who understand the manufacturing sector can provide you with valuable guidance and support. Experienced tax advisors can assist you with assessments, appeals, incentive applications, and strategic planning — helping your company enhance its tax savings.

Tax professionals can also provide you with insights into industry-specific tax breaks and guide you through compliance with all relevant regulations. Regular professional consultations can help you anticipate, prepare for, and swiftly adapt to changes in tax laws, helping you sustain tax efficiency.

Reduce Your Property Tax Liabilities to Improve Your Financial Performance

Lowering real estate and depreciable property tax burdens in the manufacturing sector requires a proactive and strategic approach. Your company may be able to significantly reduce its tax liabilities by regularly reviewing property declarations, appealing aggressive valuations, and utilizing available incentives while maintaining updated records and optimizing property use. Additionally, engaging with local authorities, investing wisely in property improvements, and collaborating with tax professionals could further enhance your savings.

Implementing these strategies can not only improve your financial performance but also provide you a competitive edge in the market.

How MGO Can Help

Don’t let property taxes unnecessarily burden your manufacturing business. With extensive experience working with manufacturing and distribution companies, our tax professionals can help you get the most from your tax savings. Reach out to our team today to start optimizing your property tax management and improving your company’s financial performance.

The Manufacturer’s Guide to Building Brand Loyalty and Trust

Key Takeaways:

U.S. companies must follow data privacy rules, not only for legal compliance but to build brand trust and loyalty.

As manufacturers increasingly adopt advanced technologies like artificial intelligence (AI) and machine learning, protecting customer data becomes more essential — and more complex.

Key compliance gaps include outdated tracking technologies, third-party data sharing risks, data collection without clear consent, and challenges from emerging technologies.

U.S. companies are legally bound to follow data privacy rules and protect customer data. However, upholding data privacy standards is more than just a legal requirement; it’s imperative to building brand loyalty and trust.

As data usage continues to increase for manufacturers, protecting customer data and privacy may prove more challenging. According to BDO’s 2024 Manufacturing CFO Outlook Survey, 35% of manufacturers now use advanced analytics, including forecasting and predictive models. They are also increasing their spending on innovative technologies, such as artificial intelligence and machine learning. Additionally, 30% of manufacturers consolidate their data in a central location and share it across the organization, which can introduce security vulnerabilities.

As manufacturers continue to enhance their digital maturity through Industry 4.0 initiatives, they will need to continually refine their protection and data privacy programs.

Key Concepts to Know

Building a strong program foundation depends on two concepts: Iteration and Data Protection ‘by Design’ and ‘by Default.’

Iteration: Data privacy compliance is a journey, not a destination — it requires ongoing monitoring, testing, and improvement of the protection and data privacy programs that support it. Manufacturers should focus on developing an ongoing, overarching culture of compliance to enable the company to meet the demands of the evolving regulatory landscape.

Data Protection ‘by Design’ and ‘by Default:’ Data Protection ‘by Design’ and ‘by Default’ approaches are critical to building a strong program foundation. These approaches integrate privacy and data protection practices into the organization’s activities from the beginning, which helps mitigate risk, close compliance gaps, foster trust with users and customers, and reduce the likelihood of privacy violations.

Ready to build the right foundation for your protection and data privacy program? Read on to get started.

Have You Seen Any of These Red Flags?

Before getting started with our checklist, take a moment to think about whether your company has experienced any of the following scenarios, which may be a driver for change.

Consumers complain about a lack of transparency in the amount of personal data you collect about them, or the ways in which you handle their personal data.

Your company receives a high volume of complaints or regulatory inquiries.

Your services or products put you in the category of high-risk controllers or processors because of the amount of personal data you collect or process.

Your company experienced a decline in user engagement, and it is driving a reduction in market share or brand recognition.

Privacy activists are filing lawsuits against your company or your peers.

Your industry is on the receiving end of frequent regulatory fines.

This is often a tell-tale sign that regulators are scrutinizing companies within your industry, so your business should work to shore up data privacy compliance processes sooner than later.

Your company has incurred a regulatory fine.

Your company has experienced a data privacy breach or cyberattack.

Common Gaps in Privacy & Data Protection Programs

While identifying privacy and/or data protection red flags may be straightforward, manufacturers need to uncover and address program gaps to strengthen their compliance. Here are four common compliance gaps to look for and address within your organization:

Tracking technologies: Companies continue to struggle with tracking technology (pixels, web beacons, and cookies) compliance. We regularly see companies fined for improperly using outdated tracking technologies, writing code that leaks data, and violating regulations. Data leakage can lead to a report of a data breach with regulators.

Data collection and consent: Companies must balance their need to collect personal data with clear and informed consent. For U.S. companies, this is a challenge since not all laws have caught up with consumer expectations. However, as data usage becomes more intricate and globalized, user consent is one of the most pivotal areas of privacy compliance programs.

Third-party data sharing: Most privacy regulations require companies to determine whether their vendors adhere to the same level of privacy and data protection standards as the hiring company. Vendor assessments and an understanding of inward and outward data flows allow manufacturers to identify potential risks and stop sharing data with a third-party if needed.

Emerging technologies: Integrating innovative technologies like artificial intelligence (AI), Internet of Things (IoT), blockchain, and biometrics while maintaining privacy standards poses challenges in understanding and mitigating risks. These technologies require manufacturers to continuously reassess and update their privacy policies and practices to promote compliance and protect users’ personal data.

Building the Baseline Program

This first checklist serves as part one of a three-part series to help your company develop a privacy & data protection roadmap and prepare for enhanced regulator and stakeholder scrutiny — especially for manufacturers in the business-to-consumer category.

The items below represent baseline best practices for privacy and data protection compliance programs. This comprehensive list, while not inclusive of every possible tactic, provides a starting point to build the foundation prior to tackling more complex activities.

Do you have buy-in to build or rebuild your privacy and data protection program? Privacy programs require a plan, budget, and buy-in at the highest levels of the organization. Build your business case, identify an executive sponsor, and get board approval to invest in consumer data protection.

Do you know where your personal data resides and who has access to it? Organizing and knowing where personal data resides and who can access it or when it is shared is a hallmark of a foundational, compliant data privacy program. To start, develop a comprehensive data inventory and identify personal or sensitive data. Key steps to take include:
- Identify data sources
- Categorize data into personal, sensitive, and other categories to evaluate its privacy significance
- Map the data flow
- Determine who owns each data category and is responsible for proper handling
- Assess data flow, transfer, and other risks associated with each category
- Record how data is collected, stored, processed, and shared
- Identify current organizational data practices to align with privacy regulations
- Define retention periods
- Understand and update access controls
- Establish a timeline to continually review and update the inventory

Is data protection a priority at the top? To build a strong privacy program, data protection must be viewed as a priority. It is also important to educate the board and executive teams to ensure they understand the differences between privacy and security. Privacy and security standards and processes are both related to protection best practices but are inherently different.

Security protects data from unauthorized access, breaches, and cyberattacks. It allows an organization to safeguard personal data and information from internal and external threats.

Privacy, on the other hand, focuses on the appropriate handling and use of personal data. Privacy measures focus on minimizing the collection of sensitive and personal data, obtaining consent to use that data, and ensuring that data is used for its intended purposes.

Is the board engaged in privacy and data protection discussions? The commitment of the board is essential to drive reputation and trust. The board’s oversight of privacy practices helps maintain the company’s brand and credibility, reduce the risk of data breaches and their fiscal impact, and drive employee engagement in data privacy best practices.

Is privacy and data protection part of your corporate strategy? Privacy considerations can influence strategic decisions about product development, partnerships, and data sharing practices. Building internal and external support channels to evaluate ways to promote privacy and data protection as a differentiator helps to build the program’s business case. Treating privacy and data protection as part of the organization’s strategy demonstrates to users and consumers that the company is serious about protecting their data.

Are you transparent and do you share data practices with the public? Your policies around data collection and processing should be highly transparent. This means proactively sharing those polices and privacy notices with customers. Studies have shown that companies that are transparent with the public about how data is collected, processed, and shared are held in higher regard by customers and regulators.

Do you destroy outdated and unnecessary data? Data retention is a critical component of every privacy program because it demonstrates that you are trying to reduce the risk of data leaks and unauthorized use. Establish retention schedules and policies to determine how long distinct categories should be retained and when they should be destroyed.

Has your company established a breach response program and evaluated it? Data breach and incident response programs are required under every privacy law regardless of your location. Manufacturers must abide by regulations that dictate how to craft a data breach response program, from the detection of a potential breach to when the organization must notify board members, employees, and customers after one has occurred.

Have you appointed a Data Protection Officer (DPO)? It is likely that a DPO is required in regions where you sell or operate. Review regulations to determine locations where you are required to have a DPO and identify regional or local in-country appointments. A common approach our clients find useful is to appoint a Global DPO with in-country or regional appointments to offset time zone, language, and cultural challenges.

Are employees required to complete privacy, security, and data protection training at regular intervals? At this stage, it is critical that companies establish data privacy awareness and training for employees. Guarding customer data is the responsibility of everyone at the organization so it should be part of regular training, awareness campaigns, and individual goals.

Going Beyond the Groundwork

This checklist can help you build the foundation for a privacy and data protection program that helps restore trust with your stakeholders, employees, and customers.

In our next checklist, we’ll provide guidance on how to evolve the steps from the foundational stage, looking at tactics such as establishing a Data Protection Committee and finetuning employee training programs.

How MGO Can Help

The manufacturing and distribution industry is marked by dynamic complexity and evolving opportunities. With these opportunities come challenges surrounding customer privacy.

To maintain brand loyalty through data security, MGO offers tailored solutions through cross-functional teams to help you navigate the data protection issues of today and position your company for lifelong customer loyalty. We can work with you to strengthen your network security, guide your employee education and training, establish compliance programs tailored to your industry, assist with enhancing the security of your manufacturing equipment and infrastructure, and more.

Maintain the integrity of your customers’ data and keep your operations running smoothly. Reach out to MGO today for support.

Is Your Manufacturing Company Missing Out on R&D Tax Credits?

Key Takeaways:

R&D tax credits reduce tax liability and provide a financial boost for manufacturing companies investing in innovation.

Qualifying for R&D tax credits involves creating new or improved products or processes and requires thorough documentation.

Misconceptions about R&D tax credits limit potential benefits. Both large and small companies can qualify for incremental improvements.

In the ever-evolving landscape of manufacturing, innovation is still the cornerstone of success. Yet, amidst the constant drive for advancement, many manufacturing companies overlook a valuable opportunity to enhance their financial health: research and development (R&D) tax credits.

These incentives are designed to reward your company for research and development efforts, providing a significant financial boost. Understanding and using these credits can make a substantial difference to your company’s bottom line.

Understanding R&D Tax Credits

R&D tax credits are federal incentives aimed at encouraging companies to invest in innovation. These credits are available to businesses that engage in activities related to developing new products, processes, or technologies. The scope of qualifying activities is broad — encompassing everything from developing new software systems to refining manufacturing processes.

For manufacturing companies, this means a wide range of projects could potentially qualify for these credits. Whether you are creating a new product line, improving existing products, developing more efficient production methods, or designing, there is a good chance your efforts could be eligible for R&D tax.

The Financial Impact

The financial benefits of R&D tax credits are considerable. These credits directly reduce your tax liability on a dollar-for-dollar basis. Essentially, for every dollar invested in qualifying R&D activities, a part of this cost can be recouped through these credits.

This reduction in tax liability can significantly enhance your company’s financial statements — freeing up capital for reinvestment in further innovation and growth. Additionally, for certain taxpayers under qualifying criteria, R&D tax credits also can be used to offset payroll tax liabilities.

R&D tax credits are not limited to federal taxes either. Many states offer other incentives, creating an even greater opportunity for financial savings. By taking advantage of both federal and state R&D tax credits, your manufacturing company can maximize its benefits.

Qualifying for R&D Tax Credits

To qualify for R&D tax credits, your company must engage in activities that align with the Internal Revenue Service (IRS) definition of research and development. The IRS uses a four-part test to decide eligibility:

Permitted purpose: The activity must aim to create a new or improved product or manufacturing process. This could involve designing a new part, developing a more efficient assembly line, or creating a product with enhanced functionality.

Elimination of uncertainty: The activity must look to analyze and eliminate technical uncertainty about the development or improvement. For example, this might involve deciding the best materials to use in a new product or figuring out how to streamline a production process to reduce waste.

Process of experimentation: The activity must involve a process of experimentation, such as systematic trial and error. In a manufacturing context, this could mean testing different prototypes, experimenting with various production techniques, or conducting pilot runs to evaluate the feasibility of new methods.

Technological in nature: The activity must be based on principles from physical or biological sciences, engineering, or computer science. For manufacturers, this often includes using advanced engineering principles, integrating new software systems into production lines, or applying scientific research to improve product quality.

Documentation is critical in this process. Detailed records of your R&D activities — including project descriptions, expenses, and outcomes — will support your claim and confirm compliance with IRS requirements. From the first hypothesis to final testing, keep thorough documentation of every step to substantiate your eligibility for R&D tax credits.

Common Misconceptions

Many manufacturing companies believe R&D tax credits are only for large corporations with dedicated research labs. This is far from the truth. Businesses of all sizes can qualify for R&D credits, and the types of activities that qualify are often broader than many realize.

Other common misconceptions:

R&D tax credits only apply to groundbreaking innovations.

The process to identify and capture these credits is too cumbersome.

In reality, both these beliefs are unfounded. It’s not just groundbreaking innovations — incremental improvements to products or processes can also qualify. If your company is making strides in efficiency, quality, or performance, these efforts may be eligible for R&D tax credits. And capturing these credits doesn’t have to be cumbersome. Engaging the services of a trusted professional will help you efficiently and effectively work through the process.

Maximizing Your R&D Tax Credits

R&D tax credits are not just a way to reduce your current tax liability; they are also a significant tax-planning tool. These credits can reduce estimated tax payments and income taxes, thereby increasing cash flow and influencing future financial planning as your company grows.

To maximize the benefits of R&D tax credits, you need to implement a strategic approach. Consider these key steps:

Find qualifying activities: Conduct a thorough review of your operations to find all potential R&D activities. Look beyond obvious projects to uncover less clear qualifying activities.

Maintain detailed documentation: Keep comprehensive records of your R&D projects — including goals, methodologies, and expenses. Proper documentation is essential for substantiating your claims.

Consult with tax professionals: Work with tax advisors who specialize in R&D tax credits. They can help you navigate the complexities of the application process and improve your claim.

Review and update annually: Regularly review your R&D activities and expenses to confirm you are capturing all eligible credits. As your company evolves, so will your R&D activities.

Unlock Your Potential with R&D Tax Credits

R&D tax credits are a powerful tool for manufacturing companies striving for innovation and growth. By understanding the eligibility criteria and keeping diligent documentation, your company can unlock significant financial benefits.

Do not let misconceptions prevent you from exploring this valuable opportunity. Engage with knowledgeable tax professionals to navigate the process and maximize your benefits.

How MGO Can Help

Our dedicated Tax Credits and Incentives team can help your manufacturing company leverage R&D tax credits to support your innovation. Reach out to our team today to learn more.

Case Study: How MGO Helped an ISO-Certified Manufacturer Maximize the R&D Credit

Background:

Since Congress created the Research and Development (R&D) credit in the 1980s, it has been an essential tax strategy for companies investing in innovation — providing much-needed support to offset R&D expenses.

Prior to 2022, companies could deduct these expenses in the year paid or elect to amortize them over 60 months. However, a provision included in the Tax Cuts and Jobs Act of 2017 — that didn’t take effect until January 2022 — required businesses to capitalize and amortize these expenses.

This change has been devastating for businesses that invest heavily in innovation. No longer able to write off these expenses immediately, many organizations struggle to maintain cash flow. In some cases, it even threatens business continuity.

While congressional efforts are underway to reverse the requirement to amortize research and experimental expenses, businesses can claim the R&D tax credit to generate tax savings in the meantime.

Challenge:

An International Organization for Standardization (ISO) certified manufacturing company specializes in machining high-tolerance plastics and metals using computer numerical control (CNC) technology. With 96 employees and an annual revenue of $11 million, the company invests heavily in R&D and has incurred roughly $1 million in qualified research expenses.

This manufacturing company had a unique opportunity to claim the R&D tax credit because companies can claim the credit on costs related to implementing ISO to improve processes and quality in their businesses.

Approach:

MGO leveraged its extensive knowledge of R&D tax credits to thoroughly analyze the company’s R&D activities — including implementing continuous improvement and process improvements to streamline quality controls.

By accurately documenting all qualifying expenses and ensuring they align with the four-part test, MGO was able to help the client maximize their R&D credit benefit.

Value to Client:

With MGO’s help, this company successfully claimed the R&D credit — resulting in a net credit benefit of $90,000 in a single year, including federal and state tax credits.

This strengthened the company’s market position by enabling it to reinvest in research, maintain its ISO certification, and improve its ability to fund further innovation, contributing to its long-term competitiveness in the industry.

Your Trusted R&D Tax Credit Advisor

MGO’s tax professionals have more than 30 years of experience helping you document, file, and defend tax credit claims.

Contact MGO today for a complimentary R&D tax credit eligibility analysis to determine if this tax incentive can help fuel innovation and growth in your organization.

Case Study: How MGO Helped a Startup Manufacturer Maximize the R&D Credit

Background:

Since the 1980s, the Research and Development (R&D) credit has offered companies a financial incentive to invest in innovation. Once limited to those passing a stringent discovery test, the credit has expanded to include a broader spectrum of businesses, thanks to the more inclusive four-part test.

This shift provides companies investing in innovation a critical opportunity to reduce their tax burden and support cash flow. However, recent legislation has changed how businesses deduct research and experimentation (R&E) expenses.

Before 2022, companies could deduct R&E expenses in the year paid or amortize them over 60 months. However, legislation passed in 2017 that didn’t go into effect until 2022 mandates that companies must amortize R&E expenditures over 60 months rather than immediately deducting them.

This has been financially devastating to many companies. Due to this change, many can’t afford to pay their tax liabilities and some are even struggling to survive.

In this environment, it’s essential for companies investing in research and development to optimize the R&D credit.

The Challenge:

A startup company focused on developing autonomous driving mechanics faced a significant challenge due to the high costs of R&D. With total investments exceeding $700,000 and annual revenue of just $5,000, they were not yet profitable and, therefore, had no income tax liability to offset.

Despite this, the innovative spirit of the company necessitated substantial investment in R&D, which was not supported by immediate tax deductions per the new regulations.

Approach:

MGO, with its deep understanding of tax regulations and R&D credits, stepped in to navigate the complex landscape of R&D incentives.

The solution leveraged the payroll tax offset, allowing the startup to apply R&D tax credits against their payroll tax liability. Prior to the 2023 tax year, claims were limited to the $250,000. Starting from the 2023 tax year, these claims can be maximized even further.

The payroll tax offset provision, available to startups with less than $5 million in gross receipts and less than five years of operation, proved vital for this early-stage company.

This strategy was crucial for the company, given its high payroll expenses and lack of taxable income.

Value to Client:

Through the strategic application of the R&D credit, MGO secured a $150,000 benefit for the company, effectively reducing its payroll tax expenses.

Using the R&D credit to offset payroll taxes provided the much-needed liquidity to support ongoing innovation efforts, demonstrating the transformative power of R&D incentives for startups.

MGO’s knowledge and experience enabled this autonomous driving startup to fully utilize R&D tax credits despite having limited revenue. By applying the credit to payroll taxes, the company could sustain its innovation journey in a challenging economic landscape.

Your Trusted R&D Tax Credit Advisor

At MGO, our professionals bring more than 30 years of R&D tax experience to help you document, file, and defend your R&D tax credit claim.

Contact MGO today to discover how we can help you maximize R&D tax credits to support your growth and innovation journey. We welcome the opportunity to provide a complimentary R&D tax credit eligibility analysis to determine whether this valuable tax incentive can fuel your business’s investment in innovation and growth.

Case Study: How MGO Helped a Product Development Company Maximize the R&D Credit

Background:

Since the 1980s, the Research and Development (R&D) credit has been providing businesses with incentives to innovate.

An essential component of qualifying for the R&D tax credit is incurring research and experimental (R&E) expenses.

Until recently, businesses were able to deduct these expenses in the year paid or make an election to amortize them over 60 months. However, a provision in the Tax Cuts and Jobs Act of 2017 changed how businesses deduct R&E expenditures.

Starting in 2022, businesses must capitalize and amortize these expenses over 60 months rather than immediately deducting them. This change has been financially devastating for companies investing in innovation.

Challenge:

A product development company focused on the nutrition and fitness markets faced significant expenses associated with developing innovative workout products and ingestible pre- and post-workout recovery supplements.

With an annual revenue of $122 million, the company made considerable investments in R&D — totaling $2 million to $4 million over the last several years.

Since the company could not deduct those expenses in the year they were incurred, it needed to recoup some of the costs to sustain its research initiatives.

Approach:

MGO brought its extensive tax experience to the table to help this product development company navigate the complexities of the R&D credit.

We verified the company’s R&D activities aligned with the four-part test to qualify for the credit and all projects were rigorously documented with records directly linking them to the four-part criteria.

Value to Client:

Through careful evaluation and strategic planning, MGO helped the client secure a substantial net federal and state R&D credit benefit of $250,000 for a single tax year. The company used these credits to offset its federal and state tax burden.

This demonstrates the significant impact that R&D credits can have on a company’s financial health. The $250,000 credit enabled the client to reinvest in its innovative product pipeline, maintain a competitive advantage, and continue developing groundbreaking nutrition and fitness products.

Your Trusted R&D Tax Credit Advisor

MGO’s tax professionals have more than 30 years of experience helping you document, file, and defend tax credit claims.

Contact MGO today to discover how we can help you maximize R&D tax credits to support your growth and innovation journey. Our team is ready to guide you through the complexities of tax incentives and deliver tailored solutions that fuel innovation and business growth.

Revisiting M4.0 Maturity at a Critical Juncture in Innovation

Fostering digital maturity means building a strategy where tech investments are made to reach specific goals.

Key Takeaways:

While many manufacturers associate digital maturity with investing in AI, that investment alone is not a strategy.

Manufacturers must ask themselves a series of key questions about their desired future state, current shortcomings and possible challenges.

Continuous progress means supporting change management and evolving strategies to adapt to shifting needs and priorities.

What Is Industry 4.0 Maturity?

Innovation is in manufacturers’ DNA. Technological advancements have enabled the manufacturing industry to increase the speed and complexity of production and remain a primary driver of U.S. economic growth over centuries of change. The printing press enabled the mass production of books. Centuries later, robotic arms allowed manufacturers to assemble thousands of automobiles to exact specifications. Today, advancements in AI are starting to enable manufacturers to engineer better products, improve their decision-making capabilities, glean deeper insights, and automate tasks beyond what was possible before.

Industry 4.0 technologies can help manufacturers gain a better sense of customer needs, boost quality control, improve factory safety, and much more. AI in particular carries promise for businesses to become more agile, efficient, and safe. According to BDO’s 2024 Manufacturing CFO Outlook Survey, 47% of manufacturers will increase investment in AI or machine learning this year. However, investments in AI that are not backed by a business strategy will not guarantee business success, nor do they signify Industry 4.0 maturity.

To nurture Industry 4.0 maturity, manufacturers need to develop a business strategy where investments in technology are made to reach specific business goals. For example, a more Industry 4.0 mature manufacturer would evaluate how AI could augment their existing Industry 4.0 strategy, and pilot use cases before rolling it out more broadly. A nonstrategic manufacturer would pour resources into expensive AI tools without giving much thought to which goals the tools could achieve.

As competitors tout AI investments, manufacturers are under pressure to keep up and appease stakeholders asking about their own AI investments. To stay competitive, leaders will need to separate AI hype for real growth opportunities. AI can power a growth strategy, but investing in AI alone is not a strategy. Instead, manufacturers should take the opportunity to revisit their Industry 4.0 strategies, assess AI opportunities, and determine their capacity to pivot their approaches.

Developing Industry 4.0 Goals

Before a manufacturer launches or revisits an Industry 4.0 initiative, it is crucial that their teams identify the challenges they want to address — what is the desired future state? What internal and external dynamics have contributed to the current gap? What is likely to impede realizing the future state? Only once manufacturers have answered these questions can they begin to articulate their goals and create a quality list of stakeholders.

Below is a hypothetical scenario where a U.S.-based furniture manufacturer asks these important questions to develop their Industry 4.0 goals.

Question 1: What Is the Desired Future State?

This manufacturer wants to have its finger on the pulse of evolving consumer demands and develop the capacity to capitalize on those market opportunities with new products. The company’s customers are increasingly swayed by what they see on social media, trend cycles are shorter, and shoppers want the latest designs immediately. If this company cannot speed up, it will lose market share to its more agile competitors.

Question 2: What Internal and External Dynamics Have Contributed to the Current Gap?

The organization lacks the capabilities to track consumer behavior data in real-time, and even for the data that it does have, it does not possess the analytics capabilities necessary to extract insights from that information. Additionally, the company does not have the operational agility to pivot product strategy to capture new trends in furniture design.

Question 3: What Is Likely to Impede Realizing the Future State?

To achieve the desired future state, the furniture manufacturer will have to invest in its data analytics capabilities. This includes its ability to capture data, particularly consumer data, from around the business. To extract meaning from this data, the company would need to invest in AI tools to develop deeper insights into consumer behavior. To allow the AI to work with its data analytics tools, the manufacturer will need to consolidate data from across the enterprise into one well-governed source of truth. The company will also need to hire and train the right people to stand up the AI program and refine AI-derived insights into an action plan.

After improving its analytics capabilities, the manufacturer may discover that there are potential customers it has not reached, or that their existing customer base’s buying behaviors are evolving. However, even after uncovering these insights, it will need to determine whether it’s profitable to act on them. For example, it will need to consider the cost and time needed to develop new designs, get those designs into production, evaluate prototypes for quality, and then bring them to market before the trend peaks. Making this kind of product pivot fast requires significant operational agility and can be costly.

Gathering Input

When starting an Industry 4.0 initiative, teams should solicit ideas and concerns from their stakeholders in a joint problem-solving effort. It is also important to gather insights from cross-functional leadership to get a full picture of potential gaps in the business strategy, as well as align the direction of the business strategy with its technology investments.

If those leading an Industry 4.0 initiative demand perfection, it puts pressure on the teams tasked with achieving an ideal future state. A defined vision is important, but teams that adopt an agile approach to goal setting may be more successful. Leaders can help prime their teams for change by helping them understand that goals should always be informed by business needs, which are almost always evolving.

Supporting Change Management

Companies that are the more mature in Industry 4.0 appreciate that change management is a continuous process that does not start or end with the launch of an initiative. This means change management tactics should be used throughout the industry 4.0 initiative to create all-important buy-in.

One tactic that may be particularly effective in engaging stakeholders, gathering critical insights, and building support is conducting a pre-mortem. This exercise involves scenario-mapping the initiative two, three, or five years from now and observing two potential outcomes: success and failure. In each scenario, stakeholders articulate the details of the future they imagine. For example, a failure scenario might be ‘reliability is low,’ or ‘costs have risen to unsustainable levels.’ Then the team would list the challenges they faced and what they could have done differently to avoid or mitigate failure. When scenario-mapping success, stakeholders also document what success looks like, such as growth or lower marginal costs, and the steps that were critical to achieving those outcomes.

Through this iterative exercise, leaders of Industry 4.0 initiatives can gain important insights from ex-stakeholders and increase buy-in for the initiative. By exploring failure, skeptics are given plenty of space to articulate their concerns and opportunities to document what the company could do to increase success, even in a worst-case scenario.

Evolving Your Industry 4.0 Strategy

As a manufacturer’s needs evolve, so should its Industry 4.0 strategy. Before considering a shift in Industry 4.0 strategy, manufacturers should ask themselves: Where do we need to grow? How can new technologies amplify these growth objectives? Where do we need to defend our market position? How can new technology help us outpace competitors?

The furniture manufacturer described earlier needed to improve its data analytics and demand forecasting capabilities to tap into trend-focused consumers. With the rise of AI, it evolved its Industry 4.0 strategy to integrate AI to improve its ability to understand the desires of customers.

Manufacturers should educate themselves about the latest advancements but avoid pursuing any new technology or idea without careful forethought and planning. Leaders should challenge themselves and their teams to think broadly and creatively about their current limitations and potential but avoid locking in on a specific solution without rigorous root cause analysis.

Agility and Communication

Even among capable organizations, the process to adopt a new Industry 4.0 strategy comes with challenges. To help prepare and reduce the impact of these issues, leaders should foster resilience within the organization, as employees will likely need to pivot mid-stream.

A common complaint from middle managers and front-line employees is that they do not understand the strategy behind the initiatives that are adopted or shelved. When these employees do not have sufficient understanding, they become disengaged and lose faith in leadership. However, delivering the necessary level of transparency is far from easy.

Once the organization has committed to a specific direction, there is often significant inertial pressure to continue in that direction, even when that direction isn’t delivering desired results. To stay on the right path, leaders of Industry 4.0 initiatives should define metrics and collect data to determine whether the strategy is working for the organization. These metrics force teams to monitor for signs the strategy isn’t working as intended from the outset and greatly increase the speed and quality of decision-making.

For example, a manufacturer may use predictive analytics to create a maintenance schedule for all equipment in one of their plants. Predictive maintenance can help improve efficiency by allowing more maintenance to happen during planned downtime. But while the manufacturer had good intentions, the investment ran into issues in implementation – setup was costly, frontline workers were not adequately trained on how to use the new system, and while there were some successes in detecting problems before they grew to be a major issue, the time and resources spent far outweighed the benefits.

The leaders of this company were determined to make it work and decided to call the pilot a success and roll it out to other plants, where similar issues occurred. If the leaders instead had taken a step back to reevaluate their approach and triage the challenges, they could have found a solution that was worth rolling out to other plants or stopped the project before costs spiraled.

Preparing for the Future

As technological innovation continues, manufacturers need to remain disciplined in their approach to technology. Successful manufacturers will treat any new advancement the same as they always have by revisiting their Industry 4.0 strategy, determining if the new tool can help them achieve their goals, and assess how they need to pivot.

At companies that have greater Industry 4.0 maturity, strategy is not set in stone. It is continually evolving and adaptable. Leaders regularly discuss changes in the marketplace and their implications with teams so employees begin to understand the nuances. Ultimately, companies with more advanced Industry 4.0 maturity are often met with employee enthusiasm and a readiness to embrace evolving strategies for an evolving world.

How MGO Can Help

In the rapidly evolving landscape of Industry 4.0, where agility and strategic foresight are paramount, MGO is well-positioned to assist your manufacturing company in navigating your digital maturity journey. By understanding the complex dynamics between technology investments and business strategy, MGO can provide tailored guidance to help make your investments in AI and other Industry 4.0 technologies integral components of a sustainable growth strategy.

Our team is adept at assisting you to ask the right questions, refine your strategies, and manage the necessary changes to stay competitive and realize your desired future state. For inquiries or support in enhancing your Industry 4.0 maturity, reach out to our team today.

Five Ways Middle Market Manufacturers Can Improve Performance and Profitability

A large majority of manufacturers in the United States are considered small, whether a lower middle-market firm or a true small business. According to the U.S. Census Bureau, in 2015, there were 251,774 firms in the manufacturing sector, with roughly 74% of the firms having 20 or less employees and 98.5% of the firms having less than 500 employees.

Having worked with a significant number of manufacturing, consumer and industrial products and food processing clients over the years, particularly in the middle-market arena, I have identified five key areas that can be better managed and improved to increase business performance and profitability. Participants in the lower middle-market, and larger small businesses, typically reach a threshold where many of these issues, if not properly managed, can significantly reduce profitability and performance.

Additionally, when revenue is increasing, management is less cost sensitive. Further when growth occurs at a fast rate over a short period, inefficiencies can develop and margins can sometimes drop. Following these guidelines can help middle market manufacturers capture more profits and continue sustainable growth.

1. Capturing and tracking all inventory costs at the point of conversion

Inventory in a manufacturing and food processing environment is more than just material costs, it also consists of labor, overhead costs, and storage in many cases. Accurately and effectively capturing all these costs and assigning them to the proper job or product is imperative if an organization wants to accurately account for their inventory assets and cost of goods sold. Properly collecting these costs requires effective processes and a system of internal controls. Correcting this deficiency will improve reporting and lead to better pricing decisions and reduce significant inventory adjustments that affect your cost of goods sold at the end of the fiscal year.

For example, not too long ago I worked with a lighting manufacturer who built specialty, custom lighting products for commercial applications. They lacked formally defined processes for requisitioning parts inventory when building and assembling their finished lighting products. Additionally, they didn’t have a system to effectively capture the usage of the inventoried parts, so much of the usage didn’t make it to the specific job within the accounting system. This allowed for inaccurate part inventory amounts and values that resulted in significant cost of goods sold adjustments at year end. Further, the assembly labor costs were not accurately tracked to the job when the work was being performed. Effectively, jobs that required more labor than was estimated at the time of the Sales Order or quote, were not being tracked and assigned on a direct cost basis.

This may seem like an exaggerated case, but it highlights the importance for structuring and designing a system that captures and tracks labor and inventory usage at the point of conversion. Deficiencies in this area lead to poor pricing decisions, inaccurate inventory and period end adjustments that will routinely reduce financial statement performance.

2. Rework and warranty claims

This is an area that is normally overlooked when costs are not significant. However, rework and warranty claims can easily become significant in a short period of time if the manufacturing process does not have a well-managed and effective Quality Control process that identifies and remediates deficiencies with continuous feedback.

I worked with a technology accessory manufacturer that used a contract manufacturer in Asia to manufacturer their product. Product quality became an issue for the main customer, which was a well-known accessory brand and a recall was eventually required. This significantly impacted the company and their financial position to a point of near catastrophe.

Another example involved an apparel company. They didn’t have a defined process to account for returned and replaced garments Although this was not a major crisis, it did impact their inventory tracking and their financial performance. If management invests early in the product development and quality monitoring cycle, needless costs can be avoided and customer happiness will be increased. Two things all manufacturers can appreciate.

3. Inefficient and excessive use of energy

Energy usage and consumption can be a huge cost driver for many manufacturers. In fact, manufacturers consume more than 30 percent of the nation’s energy. U.S. industrial users consumed 26 quadrillion btu of energy in 2018 and that amount is expected to grow at 31% to 34 quadrillion btu by 2050.

For smaller, mid-market companies, energy management does not always get the attention it deserves. But management programs and improvements can produce real cost savings that can really improve profitability. Lighting, heating and cooling, proper insulation, machine idling, and leaky boiler pipes are just a few examples that can seriously contribute to energy waste, which impacts the bottom line of many businesses. Heating and cooling large facilities alone are a significant cost.

For example, converting from a 34 watt fluorescent tube to an equivalent 16 watt LED tube would save approximately $26 per bulb if operated 24/7 for one year. Take a space that has 200 bulbs and you have an annual savings of $2,600 is operated 12 hours a day or $5,200 if operated 24 hours a day. Grants in some states, such as Maryland are available to manufacturers to improve energy utilization. This is a win-win for manufacturers and the state, as most buyers avoid improvements due to the immediate cost outlay. Consider an energy audit and put a program in place to improve the use of energy consumption throughout your plant, warehouse or office facility.

4. Material waste and theft

It is still surprising to me when I do a walkthrough of a plant and a production line and see significant waste. Waste minimization is a mindset and needs a system of controls to reduce it and ultimately prevent it. In the food processing industry, this can be compounded as once material hits the floor, it cannot be reprocessed/reworked for human consumption. I take the view that anything less than 100% of the raw material converted to the finished product is less than optimal and a loss to the organization.

For example, I once visited a seafood processing plant that produced fish nuggets and patties for commercial and institutional consumption. The fish came into the plant in a partially processed frozen block form (already scaled and deboned). These fish blocks needed to be portioned and breaded. In processing the roughly 20 pound blocks into filets, strips or nuggets, the blocks were cut with a food grade band saw. This process produced a significant amount of “fish dust” or scrap product, just a cutting a piece of wood would produces saw dust. The amount of “fish dust” was at times in excess of 8% of the weight of the fish block. This was astounding as the scrap that was produced had limited usage and value per pound. What was even more astounding was that one of the owners didn’t know how much scrap was being produced from each block.

In my mind, this was a lean Six Sigma project as the amount of waste was unacceptable and very costly. The bottom line is: know your yields and invest in limiting waste and safeguarding your raw material now to save money over the months and years ahead.

5. Ineffective financial reporting

A financial reporting function should provide your organization with accurate, timely and usable information for decision making, in addition to fulfilling compliance requirements. Information that is poorly collected and processed is not reliable, no matter how experienced your management team. Many small organizations don’t fully understand and quantify missed opportunity cost. Obviously, any new software implementation is a cash outlay, but the future savings should be quantified and measured though a net present value calculation.

The old adage “time is money” is certainly true here. An effective financial reporting system, which includes a properly implemented software product, trained users and a system of controls can provide significant value. Not only can your historical performance be measured, your organization can track and improve margins and yields when the manufacturing data is produced in a timely fashion and accurately collected. Not having an effective financial reporting function can be a road block or hurdle for bank and investor financing. If the organization does not have a perpetual inventory system, doesn’t know its gross margin by product/sku, or doesn’t have the ability to allocate and separate costs per products effectively, then improvement and remediation is needed.

If your net present value is positive, then spend the time and invest the money today to properly implement a financial reporting system that addresses your specific needs and can collect information at all the important control points. Don’t let GIGO (garbage in, garbage out) be your financial reporting function’s motto!

Addressing one or more of these areas can have a dramatic impact on your manufacturing firm’s profitability. In many cases, your organization can begin with a relatively simple assessment by an outside professional or internal resource. However, make sure to get the right professional with expertise in that area to assist your organization so you can make the most of the effort and maximize your cost savings or value add.