Five strategies to improve your bottom line
Brandon Vahl, CPA, CFE
To grow, manufacturers often focus on the top line of their income statement—revenue. However, boosting profits is the key to long-term sustainable growth. In today’s competitive marketplace, owners must review their operations every year and determine what they can we do to make more money from each direct labor hour or dollar invested in machinery. Here are five strategies to help you enhance profits and maximize the value of your business.
- Cut Overhead Costs
Boosting profits does not always mean plant layoffs. Often, cuts can be made in overhead without affecting employee morale. Examples of overhead costs include utilities, rent, marketing and customer service.
For example, it might be more cost effective to outsource customer service or shift marketing efforts from direct mail to online or social media campaigns. Not sure where inefficiencies exist? Ask people inside your organization. They know how your business operates and see inefficiencies on a daily basis. Plus, employees who help devise cost cutting measures tend to be more vested in seeing them through.
- Renegotiate Contracts
Manufacturers typically have many contracts with suppliers, lenders, lessors and insurance providers. But, they may underestimate their negotiating power in these contractual relationships. Often, you do not need to wait until contracts expire to revise the terms to be more favorable to your business. Take insurance policies as an example.
There are many insurance carriers and types of coverage. An insurance broker can help “shop” different insurance companies and evaluate the options so you are not paying for nonessential coverage or leaving gaps in your coverage. Look beyond business property and liability products and evaluate cybersecurity and employee health care policies.
Today, insurance providers may offer more cost-effective alternatives and bundling options compared to a decade ago. Likewise, evaluate your loan agreements and research what competitors offer. You may be able to negotiate more favorable terms with your lender(s) and eliminate onerous loan covenants that may be holding back your expansion plans.
- Upgrade Equipment
Every machine in your plant has a useful life that may expire while the asset is still in production. That is, old equipment may be slow, break down frequently and use excessive amounts of electricity and labor. Evaluate each fixed asset, especially those that are fully depreciated, and assess how next-generation technology might affect productivity.
In some cases, labor-intensive equipment can be retired and replaced with machines equipped with artificial intelligence (AI). In other cases, energy-efficient machines may be able to lower electricity bills and reduce materials waste.
- “Upgrade” Employees
Are the skills of your workers sufficient? Some employees may benefit from additional training courses to improve their technology skills and teach them how to use new equipment or production techniques. Improvements in skills and job satisfaction can lead to higher productivity. In other cases, you might consider new hires to infuse your organization with fresh ideas.
For example, a new plant manager might have novel ideas for how to reorganize the production line or organize the warehouse to reduce queue time and improve productivity. Or, a new controller might recommend accounting or inventory tracking software that reduces overhead costs and administrative headaches.
- Revise Business Structures
Review your business structures to determine whether all the entities have a purpose. In some cases, you may decide to eliminate a business structure to reduce administrative costs and complexity. On the flip side, some companies are too simple. Assess whether any business lines or assets expose the rest of the organization to unnecessary risks. You may decide to add a business structure to safeguard your core operations from risk.
For example, if your business owns real estate, you might want to carve that out into a separate business entity in case a legal claim is made against the property.
When it comes to profits, manufacturers cannot afford to rest on their laurels. Owners and management must always look for ways to operate more efficiently. Contact your financial advisors for best practices to help boost profits in 2019 and beyond.
Sidebar: Eye on taxes
The Tax Cuts and Jobs Act (TCJA) introduced several tax-saving opportunities for businesses. In particular, privately held manufacturers may benefit from the following provisions:
- Flat 21% tax rate for C corporations;
- 20% qualified business income deduction for S corporations, partnerships and other so-called “pass-through” entities;
- Expanded Section 179 and bonus depreciation deductions;
- Expanded eligibility for simplified tax accounting methods, such as cash-basis accounting and simplified inventory accounting methods; and
- Approximately doubled lifetime gift and estate tax exemption and generation-skipping transfer (GST) tax exemption.
For 2019, the lifetime and GST tax exemptions are $11.4 million (effectively $22.8 million for married couples). This amount will be adjusted annually for inflation through 2025. But these high exemptions will expire in 2026, unless Congress extends them. They provide a limited-time opportunity for private business owners to transfer business interests and wealth across generations tax-free.
4 ways tax reform could benefit U.S. manufacturers
Seamus Donoghue, CPA, MST
The Tax Cuts and Jobs Act (TCJA) is long and complicated. Its effects will vary from business to business, depending on each one’s structure and the nature of its operations. Here are four major changes that are likely to save taxes for domestic manufacturers.
- Lower Tax Rate for C Corporations
The TCJA permanently lowers the federal income tax rate for C corporations to a flat 21%. The low, flat tax rate is good news if your business earns enough taxable income to have fallen into the 25%, 34% or 35% bracket under prior law. But, it is bad news if you would have fallen into the 15% bracket.
Fortunately, there is at least one silver lining for smaller manufacturers that would have otherwise been in lower tax brackets. The TCJA liberalizes the eligibility requirements for smaller businesses to qualify for the cash method of accounting.
This method generally provides greater flexibility in tax planning by deferring revenue recognition and accelerating expense recognition, compared to the accrual method of accounting. In addition, the TCJA liberalizes the eligibility requirements for small businesses to use simplified inventory accounting methods.
- Lower Tax Rates for Individual Owners of Pass-Through Entities
There is good and bad news for owners of pass-through entities, such as sole proprietorships, partnerships, S corporations and limited liability companies (LLCs). The bad news is that tax cuts for individuals are relatively modest, and they are only available through 2025.
A key upside is that individual owners of many manufacturing companies will qualify for a new deduction of up to 20% of qualified business income (QBI). This break is intended to help achieve parity between the tax rates for C corporations and pass-throughs under the TCJA. But, it is available only through 2025 and it is subject to many rules and restrictions.
The limitations that are most likely to hit manufacturers relate to W-2 wages and the basis of qualified property. The QBI deduction is generally limited to the greater of an owner’s share of 1) 50% of the amount of W-2 wages paid to employees by the business during the tax year, or 2) the sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.
So, the QBI deduction for pass-through owners with few W-2 employees and/or limited fixed assets may be partially phased out. However, these limitations do not kick in until the individual owner’s taxable income (calculated before any QBI deduction) exceeds $157,500, or $315,000 for a married owner who files jointly.
- Changes to the AMT Rules
The TCJA permanently repeals the corporate alternative minimum tax (AMT). Under prior law, corporations faced an AMT rate of 20% of AMT income above an exemption amount, minus any AMT foreign tax credit.
In addition, the new law temporarily increases the AMT exemption amounts for individuals through 2025. As a result, fewer owners of pass-through businesses will owe the AMT starting in 2018, and those that do will generally owe less than they would have under prior law.
- Expanded Sec. 179 and Bonus Depreciation Deductions
For qualifying property placed in service in tax years beginning after December 31, 2017, the maximum Section 179 deduction permanently increases to $1 million (up from $510,000 for tax years beginning in 2017). In addition, the Sec. 179 deduction phaseout threshold increases to $2.5 million (up from $2.03 million for tax years beginning in 2017). These amounts will be adjusted annually for inflation. The TCJA also expands the definition of eligible Sec. 179 property.
Additionally, the first-year bonus depreciation program has become much more generous under the TCJA. For qualified property placed in service between September 28, 2017 and December 31, 2022, the first-year bonus depreciation percentage on qualifying new and used property increases to 100% (up from 50% in 2017). First-year bonus depreciation is scheduled to be reduced as follows:
- 80% for property placed in service in calendar year 2023;
- 60% for property placed in service in calendar year 2024;
- 40% for property placed in service in calendar year 2025; and
- 20% for property placed in service in calendar year 2026.
For certain property with longer production periods, the preceding cutbacks are delayed by one year.
These key changes are just the tip of the iceberg. The TCJA may significantly alter income tax obligations for your business’s current tax year. If you have additional questions about the effects of tax reform, contact a tax professional.
Sidebar: The dark side of tax reform
Several provisions of the Tax Cuts and Jobs Act (TCJA) are unfavorable to businesses. Specifically, manufacturers should watch out for new limits on:
- Interest expense deductions;
- Net operating losses (NOLs);
- Deductions for business entertainment; and
- Certain transportation-related employee benefits.
In addition, the TCJA repeals the domestic production activities deduction under Section 199. Starting in 2022, manufacturers will be required to capitalize and amortize specified research or experimental expenditures, rather than to expense them immediately.