September 10, 2020

5 Ways Manufacturers Can Increase Cash Flow to Offset COVID-19

With months of state and local business capacity limits and social distance measures implemented during COVID-19, many stores have been forced to close and consumer spending has decreased. In turn, many companies, including manufacturers, have become even more focused on cash flow planning. Now with factories and businesses beginning to open back up, management has the responsibility to review essential strategies and focus on enhanced cash flow planning in order to protect the health and welfare of their basic business operations.

Steps for Improving Cash Flow

Manufacturers can look at optimizing various strategic aspects of their businesses and working capital in order to improve and enhance cash flows. Below are five ideas on how to harness some of these strategies in order to help with cash flow management.

1) Leverage Financing

Many manufacturers have a lot of availability under lines of credit. By identifying strong levels of inventory or receivables, these can be used as collateral to draw on current credit lines, which will ensure immediate cash needs are met. Financing options may dwindle over time as customers choose to extend payments and as receivables age, decreasing the value that inventory and these receivables would provide as collateral, so acting on this sooner rather than later is beneficial to most businesses.

2) Cut Costs

There are many avenues that a manufacturing company can take in order to reduce and manage costs. A couple of examples include postponing a 401(k) match, cutting temporary staff and leasing equipment rather than purchasing it. Another avenue is to streamline processes which can indirectly help reduce costs. By focusing on how to effectively improve a manufacturing process and reduce the time, energy and costs associated with it, this sets up a company to become overall more efficient and stronger which can combat any future slow periods and help the company surge ahead during peak periods.

3) Manage Inventory

Many manufacturers strive to maintain inventory levels that are high enough to ensure a quick and timely reaction to incoming orders. Reviewing inventory needs can lead to companies maintaining more appropriate levels of inventory on hand by lowering safety stock levels to conserve cash without reducing their abilities to fulfill orders.

4) Delay the Accounts Payable Process

Manufacturers can stretch out payments by coordinating and staggering the timing of when to pay vendors and suppliers by reviewing their payment options in order to take advantage of any discounts for earlier payment versus delaying payment in full for vendors who have a longer payment period.

5) Review Accounts Receivable Process

Manufacturers should evaluate their collection strategies by reviewing invoice presentation as many companies struggle to send invoices to customers in a timely manner or the invoices have incorrect information reported that delays a customer’s payments. Also, a company can consider the timeliness of when an invoice a generated, when it is sent to the customer, if there are electronic options to send the invoice to the customer and to have the customer pay, such as ACH, credit cards or other electronic means which can all speed up cash collections. As mentioned in #4, customers may also be utilizing a strategy of delaying payments to vendors. Manufacturers should address and improve their collection policies or offer discounts or incentives to customers for faster payment.

To discover personalized cash flow strategies for your business, contact an Anders advisor below. Learn more about our COVID-19 Business Recovery services or how we work with manufacturers and distributors.

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June 28, 2019

Saved Manufacturer Over $350,000 Through R&D Study

Our manufacturing client had utilized the Research & Experimentation (R&D) tax credit in the past, but our team questioned if they were getting the maximum benefit from their current method of capturing research wages and related costs. By completing a full R&D study, we identified additional wages and supplies that could be included to bolster the client’s R&D credit opportunities for each year of the study. By amending the prior three years of tax returns, our team discovered over $350,000 in additional savings.

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April 2, 2019

How Manufacturers Can Save on Sales/Use Tax for Government Contracts

Manufacturing companies that sell equipment to the federal government or government contractors could be eligible for a tremendous tax benefit. The opportunity can help reduce sales/use taxes paid for consumables purchased in support of such government contracts.

The federal government is the single largest purchaser of goods and services, and is not subject to sales/use tax. If a manufacturer is needlessly paying tax on overhead purchases, the government is indirectly paying that tax through the manufacturer’s costs.

What Manufacturers May Be Overlooking

Federal Acquisition Regulations (FAR) govern the US Government’s purchases and these regulations are strictly followed. Many federal contracts provide for title transfer of contractor-acquired property. There are specific clauses that can be present in a contract either by language or reference to the clause number. This information can easily be overlooked, unless the manufacturer/contractor knows the clause number and what it represents. The clause numbers vary, depending on the type of contract: fixed price, cost reimbursement, etc.

Utilizing Tax Savings for a Competitive Advantage

In many states, “title transfer” is equivalent to “sale”, and therefore is a purchase for resale by the manufacturer/contractor. Transfer of possession is not necessary for the resale exemption to apply. Items on which the exemption can apply are: office supplies, computers, copiers, some fixed assets, etc. The top government manufacturers/contractors take advantage of this opportunity and can factor the savings into their bids, thereby outbidding those manufacturers who are unaware of the opportunity, or who do not take advantage of it. Many manufacturers are also unaware that they can also be reimbursed by the federal government for the cost to acquire the refund as it reduces the cost the federal government pays.

The Anders State and Local Tax Services Group has the expertise to pursue these refunds and can do so on a contingency basis. Contact an Anders advisor to learn more about a reverse audit for your business.

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January 23, 2019

National Manufacturing Outlook Survey Offers Look Ahead into 2019

Anders has teamed up with the Leading Edge Alliance (LEA) to jointly release the results from the 2019 LEA National Manufacturing Outlook Survey.

For the third year, more than 350 manufacturing executives participated in the survey from a variety of industries including industrial, machining, construction, transportation and automotive, and food and beverage, among others.

Manufacturers indicated optimism about the regional economy, sector growth and increasing revenue in 2019. Technology is becoming a larger priority, with spending expected to increase on big data, business intelligence and cybersecurity.

Survey results for 2019 include:

  • 48% of respondents expect their international sales to increase in 2019
  • 81% expect their revenue to grow this year
  • Manufacturers are more optimistic about their regional economic outlook than in 2018
  • Top three priorities for 2019 are growing sales, improving profitability and addressing the workforce shortage
  • More than half of survey participants cited the labor shortage as the greatest risk or barrier to growth, and 62% of manufacturers expect to increase hiring
  • 62% of manufacturers plan to increase spending on technology to generate organic growth in 2019, with cybersecurity, managing ERP consolidation and predictive business analytics being the top three priorities

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Despite the improved outlook, hurdles remain. Increasing raw material and labor costs, lack of available talent and greater competition are growing concerns of manufacturers going into 2019. The Anders Manufacturing and Distribution Group is here to help your company overcome these challenges and make educated financial decisions. Please contact an Anders advisor to discuss how the Manufacturing Outlook Survey results will affect your business.

Complete the form below to receive a copy of the LEA Manufacturing Outlook Survey results.

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November 6, 2018

How the New Revenue Recognition Standard Will Impact Manufacturers

The new revenue recognition standard includes important provisions that manufacturers need to be aware of. Effective 1/1/2019 for private companies with calendar year ends, the new standards will change the way manufacturing companies recognize revenue.

Variable Consideration

Manufacturing companies will often offer sales incentives to their customers, such as rebates, volume discounts or other price concessions. These incentives create variability in the pricing of goods or services offered to customers. Under the new standard, if the transaction includes variable consideration, the company would be required to estimate the transaction price by using either the “expected value” approach or the “most likely amount” approach, depending on which method the company expects to better predict the amount of consideration to which the entity will be entitled. Judgment is necessary in determining whether the expected value or the most likely amount is more predictive of the amount of consideration in the contract.

Regardless of which technique is used to estimate the transaction price, some or all of an estimate of variable consideration is only included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.  As a result, companies may have to recognize some or all of the probability-weighted amount or most likely amount estimated.

Contract Costs

The new standard also provides guidance on accounting for costs associated with obtaining or fulfilling a contract. Incremental costs of obtaining a contact, such as sales commissions and fulfillment costs not included in the scope of other guidance, should be generally capitalized when those costs are expected to be recovered and they are directly related to a contract. There is a practical expedient allowing companies to expense these costs if they are expected to be amortized in less than one year. Under current standards, there is limited guidance related to these costs and many companies have generally elected to expense these costs immediately.

These are just a couple considerations for manufacturing companies. Many companies may think their businesses and sales processes are not complicated enough for this new standard to have a significant impact on how they recognize revenue, but don’t assume this. The standard contains provisions that may create unexpected issues for certain manufacturing companies. Contact an Anders advisor to make sure your company is prepared for the new revenue recognition standard.

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October 30, 2018

Fiscal-year Corporations Subject to Blended Tax Rates Following Tax Reform

The new 21% corporate tax rate allows C corporations to pay federal taxes at a significantly lower tax rate than the 35% top rate in prior years. While the new tax rate took effect beginning in 2018, this new benefit is delayed for C corporations with a fiscal-year end. If the company’s tax year begins on or before the effective date of 12/31/17, they will not be able to take full advantage of this tax reduction in the first year.

Calculating Blended Rates for Fiscal-Year Corporations

Fiscal-year corporations will be facing what the IRS calls a “blended rate” for 2018.  This rate will be calculated by applying both the 2017 and new 2018 rates to taxable income for the entire year. The company will then multiply each calculated tax by the percentage of their fiscal year that each tax rate applies. They will then add the two tax amounts together to determine their total tax for the year. Below is an example:

Company X has $20 Million in taxable income and a September 30, 2018 fiscal year end. Company X should first calculate their tax based on their 2017 rates (20 million x .35= 7 million). This 7 million should then be multiplied by the percentage of days applicable out of their fiscal year (92/365 x 7 million= approximately 1.76 million).  They should then calculate their tax using the new flat rate of 21% (20 million x .21= 4.2 million). This 4.2 million should be multiplied by the percentage of their fiscal year that the new rate applies (273/365 x 4.2 million= approximately $3.14 million).  These totals should be added to arrive at Company X’s total tax of $4.9 million.  Company X’s blended rate would be the total tax of $4.9 million divided by taxable income of $20 million to arrive at 24.5%.

Impact on C Corps

This blended rate calculation will result in fiscal-year corporations receiving some of the benefit of the lower tax rate in this first year. For all future years they will be taxed at the flat 21%.

It’s important to note for this blended rate year, deductions will be more beneficial since the tax rate is higher. That being said, these corporations may want to accelerate deductions into the current year.

Contact an Anders advisor with any questions on how these changes may impact your business, or learn more about tax reform changes in our Tax Reform Resource Center.

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October 3, 2018

Tax Reform for Manufacturers: UNICAP Exemption Changes

More manufacturers may be exempt from the Uniform Capitalization (UNICAP) rules following tax reform. The UNICAP rules from Code Section 263A generally require that certain direct and indirect costs associated with real or tangible personal property manufactured by a business be included in inventory or capitalized.

Previous Law

Before the Tax Cuts and Jobs Act was passed in December 2017, the previous law allowed for businesses with average annual gross receipts of $10 million or less in the preceding three tax years to be exempt from UNICAP requirements as it relates to personal property acquired for resale. Note that this exemption does not extend to real property, such as buildings, or personal property that is manufactured or produced by a business.

New Law

Two key changes were passed under the new tax law effective after December 31, 2017. The first key change increased the annual gross receipts test from $10 million to $25 million. This test looks at the average annual gross receipts of the preceding three tax years. The second key change now allows for any producer or re-seller that meets the revised $25 million gross receipts test to be exempt from applying the Code Section 263A UNICAP rules. Previously, the exemption did not apply to any manufacturer or producer of real or personal property.  Both revisions are favorable changes as they expand the number of entities that qualify for the exception to UNICAP application. The exemptions from these rules that are not based on a taxpayer’s gross receipts have been retained.

Impact on Manufacturers

If you have been required to apply the UNICAP provisions in prior years but now fall under the exemption, you can apply for a change in your method of accounting. You must use Form 3115 to file this change in accounting method with the IRS. In order to prevent amounts from being omitted or duplicated due to this change, an adjustment to taxable income may need to be taken into account.

Contact an Anders advisor with any questions on how these changes may impact you, or learn more about tax reform changes in our Tax Reform Resource Center.

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October 1, 2018

Anders and LEA Launch National Benchmarking Survey for Manufacturers

To fill a void of relevant benchmarking data, Anders and our accounting association, the Leading Edge Alliance (LEA), have launched the third annual National Manufacturing Outlook Survey, and we are requesting participation. Created specifically for privately-held manufacturers, this is the only survey that concentrates solely on the middle market.

Please take a moment to participate in our survey, the more participation, the better the data companies will receive.

The survey should only take about 10 minutes to complete, and we will share the results in January. Individual responses will be kept strictly confidential. The survey will close on October 30th.

Click here to take the survey.

View the results of the 2018 National Manufacturing Outlook Survey.

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September 11, 2018

Tax Reform for Businesses: Tax Rates and AMT for C-Corporations

There has been a lot of buzz about tax reform changes and how they will affect companies in the coming tax years. Some of these changes include the reduction of the corporate and individual tax rates, the repeal of the corporate alternative minimum tax and higher individual alternative minimum tax exemptions for tax years beginning after December 31, 2017. Fiscal year corporations with tax years beginning on or before December 31, 2017 will have the benefit of a blended tax rate. Below we outline the previous law, what changed with the new law and how businesses will be impacted.

Previous Law

  • The corporate tax rate originally had a graduated structure with the lowest rate at 15% and the highest rate at 35%
  • The individual tax rate ranged from 10%-39.6% within seven tax brackets
  • Individuals and Corporations were subject to Alternative Minimum Tax (AMT), which is a second tax system. The taxpayer’s tax liability for the year was equal to the sum of the regular tax liability plus the AMT liability for the year

New Law

  • The corporate tax rate has been reduced down to a flat 21% for all C-Corporations
  • The new law includes seven individual tax brackets ranging from 10%-37% for various taxable income thresholds
  • AMT has been repealed for C-Corporations for tax years after December 31, 2017
  • AMT credit carryovers may still be used to offset tax, and 50% of the excess of the AMT credit over the tax liability will be refundable to taxpayers for any tax year beginning after 2017. This is allowed from 2018 through 2020, and any remaining credit carryover still existing in 2021 will be fully refunded.
  • After 2021, there will be no more AMT or AMT credits for corporations
  • Did not repeal the AMT for individuals, but increased the exemption amounts for tax years 2018-2025 making it less likely to hit AMT at lower income levels. The exemption amounts are $109,400 for married filing jointly and surviving spouses, $70,300 for single filers, and $54,700 for married filing separately

Impact on Businesses

Entity Structure Changes

With these changes to corporate tax, many business owners might start asking, “Should I form a C-corp now?”, but there are important things to consider. The earnings of C-corporations are taxed twice, once when the income is earned and again when the income has been distributed to the shareholders as dividends. Before making a decision, contact an Anders advisor to discuss your specific tax situation and see if an entity structure change would be beneficial for you.

Holding Real Estate in a C-Corp

Although the corporate tax rate has been reduced and the corporate AMT repealed, the same drawbacks still exist for holding real estate in a C-Corporation. As real estate appreciates in value and is sold, the gains are double taxed, and even with the lower tax rate in place and no AMT, this double taxation should be considered when considering a change of entity to hold real estate.

Contact an Anders advisor with questions on how these tax law changes will affect you, or learn more about tax reform changes in our Tax Reform Resource Center.

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August 21, 2018

Tax Reform for Businesses: Qualified Business Income Deduction

The new Qualified Business Income (QBI) deduction is an area of tax reform that may affect how some business owners structure their entities. This new deduction puts flow-through businesses on a level playing field with C Corporations. In its simplest form, the QBI deduction is equal to 20% of earned income from sole proprietorships, S corporations and partnerships. This general rule applies to single filers with taxable income below $157,500 and married taxpayers with taxable income below $315,000.

When taxable income exceeds these thresholds, the QBI deduction is limited to the lesser of:

  • 20% of taxable income less net capital gains, or

The greater of:

  • 50% of the taxpayer’s allocable portion of W-2 wages deducted by the business, or
  • 25% of the taxpayer’s allocable portion of W-2 wages deducted by the business plus 2.5% of the taxpayer’s allocable portion of unadjusted basis of the businesses income producing property

The QBI deduction phases out for service businesses when taxable income is between $157,500 – 207,500 for single filers and $315,000 – $415,000 for married taxpayers.  Service businesses include healthcare, law, consulting, athletics, financial services and brokerage services.

Subject to these rules, all flow-throughs are all eligible for the QBI deduction, however, the deduction varies under nearly identical circumstances based on entity type.  Below we go into detail about the differences of the QBI deduction for various entities using the same basic fact pattern.

Fact pattern 1:

In 2018, an architecture business, which is not considered a personal service business, with one owner generates $500,000 of QBI.   The business has no outside employees and no substantial fixed assets.  The business owner has total taxable income of $550,000.

Sole Proprietorship

Because the proprietor’s taxable income exceeds $315,000, the QBI deduction is limited to the lesser of 20% of QBI ($100,000) or 50% of W-2 wages ($0).  As a sole proprietor, the taxpayer cannot pay herself a wage and self-employment income is not considered wages for purposes of the QBI deduction.  As a result, the proprietor gets a $0 QBI deduction.

S Corporation

As an S Corporation, the business owner is required to pay herself a reasonable salary.  On the other hand, there’s a natural incentive to keep wages as low as possible to save on payroll taxes.  For purposes of this example, assume the business owner pays herself a salary of $130,000 leaving $370,000 of K-1 income (QBI).

The QBI deduction is again limited to the lesser of 20% of QBI ($74,000) or 50% of W-2 wages ($65,000).  The result is a $65,000 QBI deduction which equates to roughly $22,750 ($65,000 x 35%) in federal tax savings.

Partnership

In a partnership setting, of course, you’d need another owner.  For purposes of this example, let’s assume the proprietor’s spouse owns a 1% interest in the business.  Because partnerships can’t pay their partners a wage in accordance with IRS rules, there are no wages to pass the 50% limitation and the taxpayer gets a $0 QBI deduction similar to if she were a sole proprietor.

It’s important to note the result doesn’t change if the partnership pays its partners a guaranteed payment.  The guaranteed payment is not considered wages for purposes of calculating the QBI deduction.  Furthermore, the guaranteed payment isn’t even considered QBI for the taxpayer.

Conclusion

Everyone should rush out to file an election to be taxed as an S Corporation, right? Not so fast. Let’s change the fact pattern slightly and see how the pendulum swings.

 

Fact Pattern 2:

In 2018, an architecture business, again not a personal service business, with one owner generates $500,000 of QBI.   The business still has no substantial fixed assets, but it does pay $250,000 of wages to outside employees.  The business owner has total taxable income of $550,000.

Sole Proprietorship

Because the proprietor’s taxable income exceeds $315,000, the QBI deduction is limited to the lesser of 20% of QBI ($100,000) or 50% of W-2 wages ($125,000).  In this scenario, the proprietor gets a $100,000 QBI deduction worth approximately $35,000 ($100,000 x 35%) in federal tax savings.

S Corporation

Assuming the same breakdown of $130,000 in proprietor wages and $370,000 of K-1 income (QBI) as discussed previously, the QBI deduction is limited to the lesser of 20% of QBI ($74,000) or 50% of W-2 wages (($250,000 + $130,000) x 50% = $190,000).  The result is a $74,000 QBI deduction which equates to roughly $25,900 ($74,000 x 35%) in federal tax savings.

Partnership

Partnerships can effectively put themselves in the same position from a QBI deduction standpoint as a Sole proprietor or an S Corporation depending on whether they choose to pay themselves a draw or a guaranteed payment.

If the partner takes a draw, QBI is $500,000 and the QBI deduction is $100,000 just like it is for a sole proprietor.

If the partners takes a $130,000 guaranteed payment, QBI is $370,000 and the QBI deduction is limited to $74,000 similar to the S Corporation Scenario.

Conclusion

Under this fact pattern, the greater QBI deduction goes to those being taxed as sole proprietor or a partnership.

Please note there are many factors beyond the QBI deduction to consider when determining the appropriate entity structure for your business, but hopefully these examples speak to the added complexity associated with entity selection under our new tax law.

Before selecting an entity structure or changing what’s already in place, taxpayers should do a detailed analysis of the pros and cons of each possible scenario. Contact an Anders advisor with questions on how QBI will affect your business, or learn more about tax reform changes in our Tax Reform Resource Center.

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