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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.

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.

Orphan Drug Credits: A Significant Tax Incentive for Biotech Companies

Key Takeaways:

Orphan drug credits offer a significant tax incentive to encourage pharmaceutical companies to develop treatments for rare diseases.
The tax credit is worth up to 25% of qualified clinical testing expenses.
It is possible for companies to claim both R&D and orphan drug credits in the same tax year, maximizing support for a broad range of medical research.

Developing new pharmaceuticals and bringing them to market is an expensive endeavor. Uncommon diseases and conditions, often called “orphan diseases,” affect small populations in the United States. Given the high costs of research and development (R&D), this limited patient base can make treatment development less economically attractive for pharmaceutical companies.

Congress passed the Orphan Drug Credit (IRC Section 45C) to address this challenge and encourage the development of treatments for less profitable drug therapies.

What Is the Orphan Drug Tax Credit?

The Orphan Drug Credit is a federal tax credit designed to encourage pharmaceutical companies to invest in the research and development of treatments, cures, and preventive measures for rare diseases or conditions.

Before the Orphan Drug Act was enacted in 1983, life sciences companies often hesitated to invest in development costs for rare diseases because the small populations of potential patients made it difficult to recover development costs.

If your testing qualifies, the nonrefundable tax credit equals 25% of qualified clinical testing expenses (QCTEs) for the current taxable year.

In general, you can claim the credit between the date the U.S. Food and Drug Administration (FDA) grants the orphan drug designation and the date it approves the drug for patients.

Orphan Drug Tax Credit Eligibility Criteria

To qualify for the Orphan Drug Credit, you must first receive an orphan drug designation from the FDA. This designation is granted to drugs intended for the treatment, diagnosis, or prevention of diseases or conditions that affect fewer than 200,000 people in the United States or that affect more than 200,000 people but are not expected to recover the costs of developing and marketing a treatment drug.

Once receiving the orphan designation, you can deduct 25% of qualified clinical testing expenses incurred in the U.S.

Eligible expenses are similar to those that qualify as research and experimental expenditures for the R&D credit. Some examples include:

Wages paid to employees performing clinical testing
Costs incurred for supplies used directly in conducting clinical testing
Payments made to another party for computer hosting and leasing pertaining to clinical testing activities
Payments made for qualified research undertaken by contractors

Research activities funded by a government entity or another entity other than the taxpayer do not qualify for the tax credit.

Orphan Drug Tax Credits vs. R&D Tax Credits

The Orphan Drug Credit and the R&D credit (IRC Section 41) offer substantial financial incentives to spur U.S.-based research. However, the Orphan Drug Credit provides a greater incentive than the R&D credit.

If you are researching non-orphan diseases, you can claim the standard R&D credit, which on average results in an overall credit benefit of roughly 10% of the qualified expenses.

Other benefits of the Orphan Drug Credit include claiming 100% of qualified contract research expenses, compared to 65% under the R&D credit, and claiming the credit on foreign clinical testing expenses provided the testing meets certain criteria. The criteria include:

The testing is conducted outside the United States because there is an insufficient testing population within the U.S., and
The testing is conducted by a person inside the United States or any other person not related to the taxpayer to whom the designation under Section 529 of the Food, Drug and Cosmetic Act applies.

Ideally, you can claim the Orphan Drug credit on qualified clinical testing expenses until the FDA approves your drug for patients, then claim the R&D credit for any ongoing qualified research expenses post-FDA approval.

Is it possible to claim both the R&D credit and the Orphan Drug Tax Credit in the same tax year?

Yes, you can claim both credits in the same tax year, provided you meet the eligibility criteria for each. However, the expenses used to claim the Orphan Drug Credit cannot also be used to claim the R&D credit. The return on investment is greater under the ODC, so a company with an eligible orphan drug designation would likely pursue the ODC credit pertaining to those expenses. A company may have expenses pertaining to a non-ODC program, or expenses incurred prior and post the ODC eligible timelines, that would benefit under the R&D credit.

How MGO Can Help

The Orphan Drug Credit provides significant incentives for pharmaceutical companies developing treatments for rare diseases, making these endeavors more financially viable.

As with any tax credit, the qualifications for claiming the Orphan Drug Credit are nuanced, and it’s critical to have the necessary documentation to calculate and substantiate your claim.

If you need help determining which expenses qualify, calculating your credit, or determining how it works in tandem with the R&D credit, call or contact MGO online today. We’re happy to help you identify potential qualified expenses and maximize the tax benefits of bringing these new drugs to market to treat rare diseases.

How Your Company Can Claim the CHIPS Act Tax Credit

Key Takeaways:

The CHIPS Act provides more than $50 billion to boost U.S. semiconductor manufacturing, including current funding opportunities for commercial fabrication facilities and advanced packaging research and development (R&D).
The Advanced Manufacturing Tax Credit (Section 48D) offers a 25% credit for qualified investments into semiconductor manufacturing facilities placed in service from 2023-2026.
Companies seeking CHIPS incentives or 48D credit should understand eligibility requirements, review application process details, and connect with specialized tax credits and incentives professionals to ensure maximum benefit.

On August 9, 2022, President Joe Biden signed into law the Creating Helpful Incentives to Produce Semiconductors Act of 2022 (commonly referred to as the CHIPS Act). The legislation provides $52.7 billion to increase semiconductor research and development in the United States. The CHIPS Act also established the Advanced Manufacturing Tax Credit (Section 48D), available to entities that manufacture semiconductors.

Recently, the government awarded its first major CHIPS Act grant – providing $1.5 billion to GlobalFoundries, one of the world’s leading semiconductor manufacturers, to expand its semiconductor production in New York and Vermont. That grant is expected to be the first of several announcements in the coming months as the government ramps up CHIPS Act funding.

What is the Purpose of the CHIPS Act?

The intent of CHIPS is simple: the U.S. wants to incentivize domestic companies to manufacture semiconductors. The president called the CHIPS Act a “once-in-a-generation investment in America itself,” as the legislation aims to lower costs and create jobs in the production of these advanced chips.

The COVID-19 pandemic forced the semiconductor industry to operate at a reduced capacity, while lockdowns increased demand for products using semiconductors (computers, tablets, gaming systems, cars, etc.). This created a perfect storm, fueling a shortage of semiconductors. As a result, the U.S. recognized the need to increase its semiconductor output.

However, manufacturing semiconductors is not cheap and requires substantial investments. CHIPS, along with the available tax credit, encourages these investments.

The CHIPS Act includes provisions for:

$39 billion in incentives to build, expand, or modernize domestic facilities and equipment for semiconductor manufacturing, assembly, testing, advanced packaging, or research and development
$13.2 billion in R&D and workforce development
$500 million for international information communications technology security and semiconductor supply chain activities

Understanding the Advanced Manufacturing Tax Credit

With the addition of Section 48D to the Internal Revenue Code, CHIPS offers a new tax credit if your company invests in advanced manufacturing facilities or facilities whose primary purpose is manufacturing semiconductors or semiconductor manufacturing equipment.

Eligible businesses can receive a 25% tax credit of “qualified investments”. You can elect to treat the credit as payment against tax (i.e., direct pay) if you do not have sufficient tax liability to utilize the credit, making this essentially a refundable tax credit.

Eligibility criteria for 48D

To be eligible for 48D, you must have made a qualified investment for any taxable year integral to an “advanced manufacturing facility” for semiconductors placed in service during that year. Qualified properties must be:

Buildings, structural components, or parts of a building (not including administrative services or other functions unrelated to manufacturing)
Crucial to the operation of the advanced manufacturing facility
Constructed or built by the taxpayer
Qualified for amortization or depreciation

Taxpayers that use facilities and equipment outside the U.S. will not be eligible (similar to other investment credit requirements). Other taxpayers ineligible for the credit include:

Foreign entities noted as “foreign entities of concern” (i.e., foreign terrorist organizations or organizations included on the Office of Foreign Assets Control list).
Taxpayers that have engaged in significant transactions involving the material expansion of semiconductor manufacturing capacity in China or another foreign country of concern.
If a taxpayer enters a transaction in a foreign country of concern within 10 years of claiming the credit, it will be recaptured.

48D timing

The tax credit applies to any property placed in service after December 31, 2022, for which construction begins before January 1, 2027. It does not apply after December 31, 2026, nor can you use the tax credit for constructing a property after this date. If construction on a facility began before January 1, 2023, the credit applies only to the portion of the construction started after August 9, 2022.

Application process

In March 2023, the IRS issued proposed regulations addressing direct payment of Section 48D credit. The proposed regulations also require taxpayers to register through an IRS electronic portal before treating Section 48D as a direct payment on a tax return.

The IRS will issue a registration number for each qualified investment for which your company is claiming a credit, and that number must be included on your tax return.

CHIPS Incentive Opportunities

To access CHIPS incentives, your company must first apply for open funding opportunities. To date, the U.S. Department of Commerce has issued three Notice of Funding Opportunities (NOFOs) through the CHIPS for America program:

Commercial Fabrication Facilities – Currently accepting applicants

Small-Scale Supplier Projects – No longer accepting applicants, in second phase of process

National Advanced Packaging Manufacturing Program (NAPMP) Materials & Substrates – Just announced on February 28, 2024

How to apply for open NOFOs

Application forms and instructions are available on the CHIPS Incentives Program application portal. FAQs, guides, and templates can also be found in the “Resources” section of the portal.

The application process includes the following stages:

Statement of interest
Pre-application (optional, but recommended)
Full application
Due diligence
Award preparation and issuance

Statement of interest – To submit a statement of interest, applicants need to register for an account on the CHIPS Incentives Portal. A statement of interest must be submitted at least 21 days prior to submitting a pre-application or full application.

Pre-application – The optional pre-application provides an opportunity to ensure your projects are consistent with program requirements. During this stage, you will receive feedback on strengths and weaknesses of your proposal and recommendations for improvement.

Full application – Both pre-applications and full applications are accepted on a rolling basis.

Due diligence – Your application will undergo review to ensure alignment with evaluation criteria specified in the Notice of Funding Opportunity (NOFO), with the possibility of requests for additional information.

Award preparation and issuance – Before receiving an award, you must have an active registration in the System for Award Management (SAM). It’s a good idea to begin the registration process for SAM.gov early as it may take anywhere from two weeks to six months (due to information verification requirements). Check out SAM.gov’s Entity Registration Checklist.

Maximizing Your Semiconductor Manufacturing Tax Credits and Incentives

Navigating CHIPS’s nuances can be challenging – especially when claiming the available tax credit and determining how it is refundable. Furthermore, companies seeking to increase their semiconductor manufacturing capacity in the U.S. should also assess application and opportunity for federal and state R&D tax credits and incentives.

With more than 30 years of experience, our dedicated Tax Credits and Incentives team can help you maximize your credit benefits, develop the appropriate documentation methodology, assist in calculating and claiming credits, and defend your claims. Our full-service firm, led by experienced CPAs and a

New High-Road Cannabis Tax Credit (HRCTC) for California Retailers and Microbusinesses Worth up to $250k Annually

Executive summary

California now has a new tax credit called the High-Road Cannabis Tax Credit (HRCTC) available for eligible cannabis retailers and microbusinesses.
The credit is available for tax years starting after January 1, 2023, through December 31, 2027, and can be applied against current year (and future) income taxes.
To claim it, you must make a “tentative credit reservation.”
Expenditures that qualify include wages for full-time employees; safety-related equipment, training, and services; and workforce development and safety.

While the cannabis industry in California has been struggling on many levels, tax credit relief has come in the form of excise tax changes for distributors and has now arrived for retailers. The High-Road Cannabis Tax Credit is a new tax credit from the California Franchise Tax Board (FTB) available for cannabis retailers or microbusinesses for taxable years beginning January 1, 2023, through December 31, 2027. In order to capitalize on this opportunity, eligible calendar-year taxpayers must make a tentative credit reservation during the month of July to claim the credit on their 2023 CA income tax return.

Who qualifies for the HRCTC

To be eligible, you would need to meet three basic requirements.

Which expenditures qualify for the HRCTC

There are several types of expenditures eligible for the credit with specific parameters that you would need to meet to qualify for them. Qualified expenditures are amounts that you have paid or incurred for any of the following expenses.

Wages for full-time employees

Not every employee has to meet these requirements — but for those that do, their wages count as a qualified expenditure. First, full-time employees must be paid for no less than an average of 35 hours per week — or they must be a salaried employee paid compensation for full-time employment.

In addition, full-time employees must be paid no less than 150% ($23.25) but no more than 350% ($54.25) of the state minimum wage. To meet the 150% minimum wage requirement, you may include the following employee benefits in qualified wages: group health insurance, childcare support, employer contributions to employer-provided retirement plans, or contributions to employer-provided pension benefits. But if you pay employees wages that surpass more than 350% of the state minimum wage, those wages are not considered a qualified expenditure.

Safety-related equipment, training, and services

Expenditures related to safety, training, and providing services can also qualify if they meet the following criteria:

Equipment primarily used by the employees of the cannabis licensee to ensure personal and occupational safety, or the safety of the business’s customers.
Training for nonmanagement employees on workplace hazards. (This includes safety audits, security guards, security cameras, and fire risk mitigation.)

Workforce development and safety

Qualified training for your employees includes:

Joint labor management training programs
Membership in a joint apprenticeship training committee registered by the Division of Apprentice Standards, and a state-recognized “high-road training partnership” (as defined in Section 14005 of the Unemployment Insurance Code).

Available credit

The amount of available credit is equal to 25% of qualified expenditures. The aggregate credit that can be claimed by each taxpayer (as determined on a combined reporting basis) is a maximum of $250,000 per year. Any unused credit can be carried over to the following eight taxable years. Availability is limited as the total cumulative amount of HRCTC available to all taxpayers is $20 million.

To claim the HRCTC on your California tax return, you must reduce any deduction or credit otherwise allowed for any qualified expenditure by the amount of the HRCTC allowed.

How do I make a tentative credit reservation — and when?

You must make a tentative credit reservation (TCR) with the FTB to claim the credit. This reservation must be made online and once you’ve done so, you’ll receive an immediate confirmation. FTB currently reports that the system will be up and running by July 1, 2023, but you can start preparing now.

How we can help

The HRCTC is a valuable tax credit opportunity for any commercial cannabis business operating in California. Determining if you qualify and calculating how much you can save could be complex. Our extensive experience in cannabis, cannabis tax, and state and local tax enables us to help you take advantage of this tax credit so you can stay focused on thriving in this ever-growing, culture-shaping industry.

Reach out to MGO’s State and Local Tax team to find out whether you qualify for this tax credit opportunity and determine how much you could potentially save.

Guide to the “Green” Tax Credits and Incentives in the Inflation Reduction Act

Executive summary

President Biden has signed the Inflation Reduction Act of 2022 into law.
This large package contains many new tax credits to incentivize taxpayers to “go green” with energy from renewable resources while simultaneously receiving financial relief.
It also extends or adds to currently existing credits for additional tax-saving opportunities.

On August 16, President Joe Biden signed the Inflation Reduction Act (IRA) of 2022 into law. Within the large tax reform package are numerous “green” tax credits focused on providing financial relief to taxpayers while incentivizing them to make sustainable choices and combat climate change.

These new credits are aimed at motivating taxpayers to use energy from renewable sources, prioritizing options like wind and solar. The IRA also introduces new credits and strengthens or extends existing credits that provide tax relief for purchasing new and used clean-energy vehicles and installing energy efficient heating and cooling systems. Additionally, companies that cut their methane emissions can access certain credits, while those that do not could face penalties.

The rules and regulations around claiming these green credits can be complicated. In this article, our Tax Credits and Incentives team breaks down how individuals and organizations can capitalize on these tax saving opportunities.

Swap gas guzzlers for an electric vehicle

Taxpayers that purchase a new or used “clean car” can qualify for this consumer tax credit. Vehicles considered clean are those that use a battery partly or fully manufactured in North America and built with materials extracted or processed in one of the countries currently in a free-trade agreement with the U.S.

Your income is a factor in how much you can reap in tax credits. If a taxpayer makes less than $150,000 annually (or has a combined family income below $300,000), the taxpayer can get up to $7,500 for new electric vehicles that qualify. Note the money would be applied at the point of sale, so the taxpayer’s monthly payments would be lowered (as opposed to reducing the tax bill months down the line).

Previously, the federal tax credit for electric vehicles did not include cars from manufacturers that already sold at least 200,000 models (GM, Toyota, and Tesla were excluded). This bill unravels that; instead, there is now a price threshold per vehicle. To qualify for the credit, bigger vehicles like SUVs, pickup trucks, and vans would have to cost less than $80,000 to qualify for the credits. Smaller vehicles are capped at $55,000. So, if you have your eye on a super sporty electric vehicle, you may be out of luck.

Taxpayers can also get $4,000 off a used electric vehicle if it is sold by a dealer for $25,000 or less — but only if they individually make up to $75,000 annually or $150,000 jointly. The addition of credits for used electric vehicle purchases is a win for the industry, and advocates of the bill are hopeful that this incentive will encourage an increase in electric vehicle adoption.

Modifying your home to be more energy efficient

To incentivize taxpayers to make their homes more energy efficient, the bill’s $4.28 billion High-Efficiency Electric Home Rebate Program provides rebates for low- and moderate-income households when they replace fossil-fuel boilers, furnaces, water heaters, and stoves with more efficient electric devices powered by renewable energy.

Some taxpayers will need to upgrade their electrical panels before they are able to install the new appliances. They can take advantage of up to $4,000 to do so. Furthermore, if they are interested in making their home generally more energy efficient, they can capitalize on a rebate of up to $1,600 given to seal and insulate their house, as well as up to $2,500 to improve their home’s wiring.

In terms of appliances, taxpayers can get up to $8,000 to install heat pumps that both heat and cool their home, plus as much as $1,750 for a heat-pump water heater. To offset the cost of a heat-pump dryer or electric stove, taxpayers can claim up to $840. It is estimated by making these changes, they can save significantly on their future energy bills.

There are several parameters for these rebates. First, the program runs through September 30, 2031 — so you do have time to implement these changes to your home. The maximum amount taxpayers can collect is $14,000, and to qualify, their household income cannot exceed $150% of the median income in the area they live. For those who do not qualify, there is a tax credit of up to $2,000 available to install heat pumps, plus up to $1,200 annually to install new windows, doors, or an induction stove.

Save when installing solar panels

Lastly, taxpayers can collect a 30% tax credit for installing residential solar panels through December 31, 2034. The credit decreases to 26% if you wait until after December 31, 2032. Taxpayers can also install solar battery systems to qualify for the tax credit.

New “green” tax credits

There are other ways taxpayers can take advantage of going green. Here are some of the new tax credits to capitalize on.

Doubling of R&D Tax Credits for Small Business Startups — Would potentially allow recipients to double the amount they can claim on any R&D tax credits (from $250,000 to $500,000 per year against payroll taxes).

Zero Emission Nuclear Power Production Credit — Provides a new business credit for electricity produced by a taxpayer at a qualified nuclear power facility before the date of enactment.

Sustainable Aviation Fuel Credit – Creates a new business credit for each gallon of sustainable aviation fuel sold or used as part of a qualified fuel mixture. The credit equals the number of gallons of sustainable aviation fuel in the mixture multiplied by the base amount of $1.25. There are increases available if the taxpayer meets certain greenhouse gas emissions reductions, and it applies to fuel sold or used in 2023 and 2024.

Production of Clean Hydrogen Credit — Given to producers of clean hydrogen during the ten-year period beginning on the date a qualifying facility is originally placed in service. It applies to clean hydrogen produced after 2022.

Advanced Manufacturing Production Credit — Provides a new production credit for each eligible solar energy component, wind energy component, eligible inverter, qualifying battery component, and applicable critical mineral produced by a taxpayer in the U.S. (or in U.S. possession and sold to an unrelated person). It applies to components and minerals produced and sold after 2022.

Clean Electricity Production Credit — New business credit for clean electricity facilities placed in service after 2024 (where the greenhouse gas emissions rate is not greater than zero). The credit amount equals the kilowatt hours of electricity produced and sold multiplied by the base amount of 3 cents or 1.5 cents. The credit will phase out one year after the later of 2032 or the year when annual greenhouse gas emissions from U.S. production are equal to less than 25% of the 2022 emissions rate (whichever comes first).

Clean Electricity Investment Credit — New investment credit for clean electricity property investments in energy storage technology and qualified facilities placed in service after 2024 where the greenhouse gas emissions rate is not greater than zero. It phases out after the later of 2032 or when the annual greenhouse gas emissions from U.S. electricity production are equal to or less than 25% of the 2022 emission rate (whichever comes first).

Clean Fuel Production Credit — Creates a business credit for the clean fuel a taxpayer produces at a qualifying facility and sells for qualifying purposes. The fuel must meet certain emissions standards.

Extension and modification of “green” tax credits

Several tax credits already in existence were extended and modified in the Inflation Reduction Act. They include:

Renewable Electricity Production Tax Credit (PTC) — Extends the beginning of construction deadline for certain renewable electricity production facilities through the end of 2024, as well as reduces the base amount of credit with the potential to qualify for five times that amount. It applies to facilities placed in service after 2021, and increases the credit amounts for domestic content, energy communities, and hydropower.

Energy Investment Tax (ITC) — Extends the beginning of construction deadline for some types of energy property, including qualified fuel cell property, for one year through the end of 2024. It extends the beginning of construction deadline for geothermal equipment through the end of 2034 and permits the credit for new types of energy property like energy storage technology, microgrid controller property, and qualified biogas.

Carbon Oxide Sequestration Credit — Extends and enhances carbon oxide sequestration credits for qualified industrial facilities and direct air capture facilities IF construction begins before 2033. It also lowers the minimum carbon capture requirement, and generally applies to those facilities and equipment placed in service post-2022.

Tax Credits for Biodiesel, Renewable Diesel, and Alternative Fuels — Extends these tax credits through 2024 and apply to fuel sold or used after 2021.

Second Generation Biofuel Credit — Extends tax credits to second generation biofuel through 2024 and applies to second generation biofuel production after 2021.

Nonbusiness Energy Property Credit — Extends this credit through 2023, as well as changes the credit rate to 30% for both qualified energy efficiency improvements and residential energy property expenditures. It replaces the $500 lifetime limit with a $1200 annual limit, modifies the limits for specific types of property, and modifies standards for qualified energy efficiency improvements on property placed in service after 2022.

Residential Energy Efficient Property Credit — Extends the residential energy-efficient property credit through 2034 and replaces the credit for biomass fuel property expenditures with a new credit for battery storage technology expenditures on those made after 2022.

New Energy Efficient Home Credit — Extends the business credit for contractors who manufacture or construct energy efficient homes through 2032. It applies to dwellings acquired by the contractor after 2022.

Alternative Fuel Vehicle Refueling Property Credit — Extends the tax credit through 2032 and increases the credit limit to $100,000 per item of depreciable refueling property and $1,000 per item of non-depreciable refueling property.

Advanced Energy Project Credit — Extends the competitively awarded investment tax credit for clean energy and energy efficiency manufacturing projects. It provides as much as $10 billion of new credit allocations effective in early 2023.

Increase in Energy Credit for Solar and Wind Facilities — In order to qualify, one must have a maximum net output of less than five megawatts and must be in a low-income community, on American Indian land, or part of a low-income residential building project (or low-income economic benefit project), effective in early 2023.

Reinstatement of Superfund Hazardous Substance Financing Rate — Reinstates a financing rate on crude oil and imported petroleum products at a rate of 16.4 cents per gallon through 2032.

Our perspective on the Inflation Reduction Act’s tax credits

Looking ahead, it is imperative that you are ready to capitalize on these tax credits. Getting into the weeds with some of the qualifications, however, could prove challenging, and working with a professional services firm could make all the difference in ensuring you take advantage of the credits you qualify for.

At MGO, our dedicated Tax Credits and Incentives team brings more than 30 years of experience in helping you structure your expenses in a way that will help you acquire appropriate documentation, assist in calculating and claiming credits, and maximize the amount you can receive. Our full-service firm, led by experienced CPAs and attorneys, provides a holistic approach to examining your organization and determining how you can best reach your goals.

About the author

Michael Silvio is a partner at MGO. He has more than 25 years of experience in public accounting and tax and has served a variety of public and private businesses in the manufacturing, distribution, pharmaceutical, and biotechnology sectors.

Businesses must navigate year-end tax planning with new tax laws potentially on the horizon

The end of the tax year is fast approaching for many businesses, but their ability to engage in traditional year-end planning may be hampered by the specter of looming tax legislation. The budget reconciliation bill, dubbed the Build Back Better Act (BBBA), is likely to include provisions affecting the taxation of businesses — although its passage is uncertain at this time.

While it appears that several of the more disadvantageous provisions targeting businesses won’t make it into the final bill, others may. In addition, some temporary provisions are coming to an end, requiring businesses to take action before year end to capitalize on them. As Congress continues to negotiate the final bill, here are some areas where you could act now to reduce your business’s 2021 tax bill.

Research and experimentation

Section 174 research and experimental (R&E) expenditures generally refer to research and development costs in the experimental or laboratory sense. They include costs related to activities intended to uncover information that would eliminate uncertainty about the development or improvement of a product.
Currently, businesses can deduct R&E expenditures in the year they’re incurred or paid. Alternatively, they can capitalize and amortize the costs over at least five years. Software development costs also can be immediately expensed, amortized over five years from the date of completion or amortized over three years from the date the software is placed in service.

However, under the Tax Cuts and Jobs Act (TCJA), that tax treatment is scheduled to expire after 2021. Beginning next year, you can’t deduct R&E costs in the year incurred. Instead, you must amortize such expenses incurred in the United States over five years and expenses incurred outside the country over 15 years. In addition, the TCJA requires that software development costs be treated as Sec. 174 expenses.

The BBBA may include a provision that delays the capitalization and amortization requirements to 2026, but it’s far from a sure thing. You might consider accelerating research expenses into 2021 to maximize your deductions and reduce the amount you may need to begin to capitalize starting next year.

Income and expense timing

Accelerating expenses into the current tax year and deferring income until the next year is a tried-and-true tax reduction strategy for businesses that use cash-basis accounting. These businesses might, for example, delay billing until later in December than they usually do, stock up on supplies and expedite bonus payments.

But the strategy is advised only for businesses that expect to be in the same or a lower tax bracket the following year — and you may expect greater profits in 2022, as the pandemic hopefully winds down. If that’s the case, your deductions could be worth more next year, so you’d want to delay expenses, while accelerating your collection of income. Moreover, under some proposed provisions in the BBBA, certain businesses may find themselves facing higher tax rates in 2022.

For example, the BBBA may expand the net investment income tax (NIIT) to include active business income from pass-through businesses. The owners of pass-through businesses — who report their business income on their individual income tax returns — also could be subject to a new 5% “surtax” on modified adjusted gross income (MAGI) that exceeds $10 million, with an additional 3% on income of more than $25 million.

Capital assets

The traditional approach of making capital purchases before year-end remains effective for reducing taxes in 2021, bearing in mind the timing issues discussed above. Businesses can deduct 100% of the cost of new and used (subject to certain conditions) qualified property in the year the property is placed in service.
You can take advantage of this bonus depreciation by purchasing computer systems, software, vehicles, machinery, equipment and office furniture, among other items. Bonus depreciation also is available for qualified improvement property (generally, interior improvements to nonresidential real property) placed in service this year. Special rules apply to property with a longer production period.

Of course, if you face higher tax rates going forward, depreciation deductions would be worth more in the future. The good news is that you can purchase qualifying property before year-end but wait until your tax filing deadline, including extensions, to determine the optimal approach.

You can also cut your taxes in 2021 with Sec. 179 expensing (deducting the entire cost). It’s available for several types of improvements to nonresidential real property, including roofs, HVAC, fire protection systems, alarm systems and security systems.

The maximum deduction for 2021 is $1.05 million (the maximum deduction also is limited to the amount of income from business activity). The deduction begins phasing out on a dollar-for-dollar basis when qualifying property placed in service this year exceeds $2.62 million. Again, you needn’t decide whether to take the immediate deduction until filing time.

Business meals

Not every tax-cutting tactic has to be dry and dull. One temporary tax provision gives you an incentive to enjoy a little fun.

For 2021 and 2022, businesses can generally deduct 100% (compared with the normal 50%) of qualifying business meals. In addition to meals incurred at and provided by restaurants, qualifying expenses include those for company events, such as holiday parties. As many employees and customers return to the workplace for the first time after extended pandemic-related absences, a company celebration could reap you both a tax break and a valuable chance to reconnect and re-engage.

Stay tuned

The TCJA was signed into law with little more than a week left in 2017. It’s possible the BBBA similarly could come down to the wire, so be prepared to take quick action in the waning days of 2021. Turn to us for the latest information.

Getting Ahead of Tax Credit and Incentive IRS Issues

Recent events in the media have shone a spotlight on issues surrounding bad practices when it comes to tax credits and incentives. This increased attention is likely to result in an influx of audits by the Internal Revenue Service (IRS) as they crack down on the Research and Development (R&D) tax and the Employee Retention Tax Credit (ERTC) in the coming years.

We recently released an article detailing the red flags to look out when dealing with tax credits and incentives providers. If you think you could be at risk for future IRS issues, there is much you can do now to take a proactive approach and mitigate future negative impact. In the following, we break down steps you can take now to better understand and manage your exposure.

An overview of tax credits and incentives

Designed to encourage investment and development, job creation, growth, and certain business activities, tax credits and incentives provide an opportunity to reduce the amount of tax owed for performing certain activities. Credits and incentives are categorically different than tax deductions, which reduce the amount of taxable income.

These incentives often target desirable industries or activities like research and development, job creation for at-risk populations, and expanded growth in underdeveloped areas. When leveraged correctly, credits and incentives can be a powerful tool to funnel back resources into your organization to fuel activities you are already doing. Even more enticing, these credits can often apply retroactively if you determine you qualify for certain credits or incentives after the fact.

There are three basic types of tax credits: nonrefundable, refundable, and partially refundable. A few of the different types of tax credits pertaining to businesses in different classifications, industries, or activities performed include R&D tax credits, the employee retention tax credits, IRC Section 179D, and the work opportunity tax credit. To learn more about their eligibility rules, visit our previous article.

Understanding the risk of IRS tax audits

There is a three-year statute of limitations from the due date of the tax return or the filing date (whatever is later) for the IRS to assess your filings. That means if you think you may be exposed but escaped the IRS’ notice, you could still receive an audit notice for previous years’ returns. And if you do get audited, and the IRS determines you owe back taxes, you will get charged penalties and interest dating back to the infraction itself.

This is even more risky when considering the IRS’s extreme backlog. These IRS tax audits can sometimes take years to complete and if your credit and incentive calculations are the topic of interest, you’ll need to halt any future credit analysis until the situation is resolved. Meanwhile, you’ll be devoting crucial resources, time, and effort working with the IRS for something that yields no financial value and distracts from more conducive business activities.

Reasons to get a head-start and address issues now

Even though there is no guarantee you will get audited, you are still taking a risk if you do not address potential tax credit and incentive exposures in your organization. It may seem easy to “roll the dice” and hope the issue will remain uncovered, but it could come at a cost — especially if you are planning to make some big moves, like engaging in transaction of your business (M&A), going public, or embarking on another major transaction.

During the due diligence period of these transactions, it is almost certain any uncovered tax issues will emerge. You will likely not recover the value of these credits or remain on the hook for potential liability. Even worse, the exposure of these issues reflects negatively on your accounting and control system, potentially lowering the purchase value of your organization or undermining whatever deal you had in place prior to the due diligence. Often your transaction partners will start to question your organization’s trustworthiness, and reputation … due to something that may be no fault of your own.

So, you’ve been exposed … but haven’t received an IRS audit notice

Here is the deal: you know for certain you have been exposed, but you have not been notified by the IRS yet. You probably have a lot of questions — will you get an audit notice? Have you escaped unscathed? Do you need to address the issues preemptively, just in case? It may be overwhelming to decide how to proceed once you realize the exposure.

We suggest working with a qualified CPA firm to review your tax filings. A full-service accounting firm will review your organization holistically at a minimum rate, uncover any exposures, and deliver valuable peace of mind. If the firm does find issues, you have two options:

Update your credit and incentive filings moving forward.
- While this will likely decrease the amount you can deduct, it exemplifies transparency.
Issue a Voluntary Disclosure (VA) if the exposure is significant and you do not have a lot of time to fix the issue.
- Essentially, you are volunteering to correct your mistakes by recalculating the credits claimed and paying back the difference.
- While this may sting a little, the IRS looks favorably upon organizations who are proactive to fix the issue by filing a VA and they are likely to waive any penalties or interest you would have had to pay.

You’ve received an IRS audit notice. Now what?

Well, it happened. You received an audit note from the IRS. Before you panic, here is what you need to do:

Start preparing your documentation right away. The sooner you have your ducks in a row, the sooner you are prepared to handle the audit.
Check the contract you signed with your original provider and verify if they provide controversy support services for situations like these.
- If they do, reexamine the quality of their work. Do they have any of the red flags mentioned in this article? Could something they have done have caused the audit?
- Consider engaging a qualified CPA firm as your new provider to handle the subsequent controversy support. Someone you trust can get you ready for any available credits and incentives moving forward, too.
If you used a provider that displays any red flags, you could have some leverage for a reasonable cause defense. Because the “professional” firm handled it for you and made a mistake, you could utilize a first-time penalty abatement, which means you can get relief from a penalty if you:
- Did not previously have to file a return or if you do not have any penalties for the three years before the tax year you received a penalty;
- Filed all currently required returns or an extension of time to file;
  and
- Paid or have arranged to pay any tax due.
Verify your contract with the original provider to determine if you have any recourse to seek compensation from them. If the IRS does issue any penalties, you will want to ensure you do not have to pay.

Standalone firms vs. full-service accounting firms

Let’s say you haven’t received an IRS notice, and you do not think you are in danger of receiving one. How can you ensure you will not in the future? It comes down to choosing a firm to help you maximize the potential of these tax credits and incentives.

The bottom line: it is imperative you work with a certified public accounting (CPA) firm instead of a standalone firm. Because standalone firms often use lower-cost, less-experienced recent graduates who are not certified public accountants, there is a distinct lack of knowledge and background in the accounting fundamentals, causing you to be misled by those unequipped to help with complex tax matters. You also run the risk of being oversold benefits by aggressive firms that not only exaggerate the amount you are receiving from the tax credits and incentives, but also behave in a way that attracts IRS attention and jeopardizes your firm.

A full-service accounting firm, on the other hand, knows how to look at an organization holistically — and it has many more capabilities and professionals with experience. It looks at things through various lenses and can advise how certain positions will impact current and future tax positions. Full-service firms also likely have an in-house controversy team that has handled hundreds of audits successfully—so you will be in good hands.

Our perspective

Tax credits and incentives provide plenty of benefits you do not want to miss out on, and their often-complex application and qualification processes are reason enough to hire a professional accountant to help you maximize your returns. Unfortunately, we often see organizations placing their trust in the wrong providers and they end up suffering the consequences of an IRS audit. For many, it is simply easier and safer to cut off the relationship with the initial provider and start fresh with a professional firm you know you can trust.

At MGO, our dedicated Tax Credits and Incentives team brings more than 30 years of experience fixing these types of issues and working with the IRS to limit the damage. We provide cleanup in the event you are being audited by the IRS (or could be audited in the future), and help you identify areas where you can claim tax credits and incentives for next time. If you are concerned, our best advice is to get ahead of it with an opinion you can trust — before the IRS decides to investigate themselves.