ORBA’s Manufacturing and Distribution Group Newsletter is a quarterly publication focused on effective manufacturing and distribution management.
Offering Incentives Can Mean Extra Income All-Around
JOEL HERMAN, CPA
Regardless of how your supply chain operates, there is no denying that cashback can be a motivator across the board — from distributors to retailers to consumers. That is why rebate and incentive programs have held steady as a solid way for manufacturers to boost their bottom lines. There are a variety of ways you can leverage cash-back incentives to move inventory and increase profitability.
Reaching the End-User
Rebates can provide the carrot consumers need to make purchases they might be on the fence about, especially if they think the rewards will be worth the effort of the application process. In the midst of a credit crunch, most auto manufacturers offer customer incentives in the form of instant cash rebates, which can fuel a down payment or provide motivation to spring for a more expensive hybrid option.
Want to sweeten the deal? Throwing in extras such as free maintenance or an extended warranty could be what it takes to lock in customers and secure their loyalty.
Reward Current Sales
Industrial manufacturers can reward loyal customers, encourage purchases from multiple product lines, and move new or less-than-popular inventory by offering rebates to builders and contractors. For example, in exchange for using a newly introduced I-beam, a steel company could offer builder discounts or cash-back incentives on future purchases. The more I-beams they purchase, the more substantial their rebates will be.
Move Your Offer Up the Chain
Sometimes the best way for manufacturers to move their products out the door is to offer incentives earlier in the supply chain to distributors and dealers. Stalled inventory means stalled growth and increased carrying costs — and providing the people who encourage the sales of your products with incentive to up their output can keep sales fluid. For example, if you deal directly with retailers or auto dealers, offer cash-back rewards for selling overstocked items or ordering more inventory.
Consider offering your distributors incentives in the form of discounts from list prices in exchange for increased performance. For example, a plastics manufacturer could offer a profitable distributor 15% off a particular type of tubing. If it costs the distributor 10% to sell the tubing to a customer, they are able to retain 5% as a reward and an incentive for continuing to keep sales strong.
Ease Incentive Use
Despite the financial incentives rebates provide, some consumers may be hesitant to cash in because they perceive the application process as confusing, with a small window of time for submission and a vague return process. In the past, some manufacturers came under fire for making consumers jump through hoops, only to delay payment. However, many states now require rebates to be paid within 30 to 60 days.
You can make the process even more user-friendly by opting for automated redemption, which allows the rebate holder to enter information from their receipt online, initiating the redemption process. Automation speeds the rebate redemption and gives consumers the ability to track the process from beginning to end.
When it comes to distributor, builder and dealer incentives, keep lines of communication open to staying on top of what products could use an extra push, what incentives have worked well as motivators and which distributors deserve to be rewarded.
Win-Win When Done Right
Getting the most from a rebate or incentive offer means providing quality, worthwhile incentives and the means to see the process through to fulfillment. If offered correctly, the entire supply chain will benefit, inventory will move more quickly and your company may realize a welcome boost in sales.
IRS Hot Buttons: Defending Your Business Against Tax Audits
DANIELLE WINKLE, CPA
Everyone has at least one pet peeve. The IRS has many. The following are some items that the IRS may target on a manufacturer’s 2014 tax return, as well as suggestions to help safeguard against an IRS audit.
How much should an owner get paid? There are as many answers to this question as there are owners and there is no right answer. The IRS will look at what unrelated third parties with the same responsibilities, schooling and experience receive for performing the same functions. Outside resources, such as recruiters and various compensation surveys, can be used to substantiate an owner’s compensation expenses.
A privately-held C corporation may try to increase an owner’s compensation in lieu of paying dividends to avoid double taxation. Conversely, an S corporation that is not subject to corporate-level taxes might try to decrease an owner’s compensation to minimize payroll taxes and, instead, pay higher distributions. The IRS is on the lookout for whichever scenario applies to your company.
Private business owners sometimes push the envelope when it comes to combining business and personal travel expenses. But the IRS has strict rules on what qualifies as deductible business travel expenses. In order to deduct travel expenses, the primary reason for the trip must be business, rather than personal pleasure.
For example, suppose you attended the International Manufacturing Technology Show in Chicago. You attended the conference for two days, but extended your stay an extra week to visit family in the Chicago area — and your spouse and kids tagged along. How much of the trip can you deduct as a legitimate business expense?
To validate the business purpose of a trip, the IRS usually considers whether your business travel days — including travel days to and from the destination, working days and standby days — exceed your personal travel days.
Meals and Entertainment
Likewise, excessive meals and entertainment expenditures are likely to catch the attention of the IRS. You generally can deduct up to 50% of business-related meals and entertainment expenses incurred for the purpose of entertaining a client, customer or employee.
Maintaining detailed records is the key to protecting your meals and entertainment deductions. Your company’s expense reimbursement forms should require the following information:
- Amount of the expense;
- Time and place where expense occurred;
- Business purpose; and
- Name and business relationship of any person(s) entertained.
Hold onto records supporting the items claimed until the statute of limitations runs out. The statute of limitations usually runs out three years from the due date or the filing date, whichever is later. However, the IRS can go back more than three years if it suspects a substantial omission of income or tax fraud. Contact ORBA for a suggested records retention schedule.
Net Operating Losses
When expenses exceed revenues, a business may incur a net operating loss (NOL). Businesses may elect to carry back (or forward) NOLs to offset income in other years. The IRS may ask your company to substantiate the loss, not only in the year it is incurred, but also when a refund is claimed for an earlier year or income is offset in a future year. Proper record retention is essential with NOLs. IRS instructions recommend saving records until NOLs no longer have an effect, plus seven years.
Tax Pros Lower Audit Risks
A small percentage of tax returns are audited by the IRS. Sometimes a business is randomly selected. But in many cases, high-risk or excessive deductions trigger an audit. The IRS keeps “norms” on how much manufacturers under different industrial classification codes typically deduct for each type of expense — but unfortunately, it does not publish these norms to the general public.
IRS auditors often have a field day with do-it-yourself returns. An advisor who specializes in the manufacturing industry can review your deductions line-by-line and help minimize your audit risks. Contact Danielle Winkle at firstname.lastname@example.org or call her at 312.670.7444 for questions. Visit orba.com to learn more about our Manufacturing and Distribution Group.