SMARTER MANUFACTURING
TAX STRATEGY

Manufacturing offers unique deduction opportunities. Common ones include raw materials, equipment maintenance, utilities for production facilities, quality control costs, and research and development expenses. Don’t overlook depreciation on machinery, tools, and production equipment.

You can also deduct costs for training employees, safety equipment, and even portions of facility costs used for production. The key is proper documentation and understanding which manufacturing activities qualify.

It depends on your size, growth plans, and capital needs. LLCs offer flexibility but may not be ideal for attracting investors. S-Corps can save on self-employment taxes but have ownership restrictions.

C-Corps work well for larger manufacturers seeking investment or planning to reinvest profits, despite double taxation. Many manufacturers start as LLCs and convert to S-Corp or C-Corp as they grow.

Timing is crucial—plan equipment purchases strategically using Section 179 deductions or bonus depreciation. The R&D tax credit can be substantial for manufacturers developing new products or improving processes.

Consider accelerating deductions in high-income years and deferring income when possible. Proper inventory accounting method selection can also significantly impact your tax liability.

Maintain detailed records of all production costs: raw materials, labor, overhead, and finished goods. Track equipment purchases, maintenance, and depreciation schedules. Document R&D activities and expenses thoroughly.

Keep payroll records, utility bills allocated to production, and any quality control or testing expenses. Good cost accounting systems make tax preparation easier and provide better business insights.

This is critical for manufacturers. You’ll need to choose between FIFO (first-in, first-out), LIFO (last-in, first-out), or weighted average methods. Each impacts your tax liability differently, especially during periods of changing material costs.

You must also properly account for work-in-process inventory and finished goods. The uniform capitalization rules (Section 263A) require you to include certain indirect costs in inventory, not expense them immediately.

Manufacturing involves significant capital investments, fluctuating material costs, and complex inventory management. Without proper planning, you might miss valuable credits like R&D or domestic production deductions.

Tax planning helps you time equipment purchases, manage inventory levels for tax efficiency, and structure your operations to maximize available incentives. It turns tax compliance into a strategic business advantage.

Poor inventory accounting is a big one—either not following consistent methods or failing to properly capitalize indirect costs. Missing R&D credit opportunities, not tracking equipment purchases for optimal depreciation, and inadequate cost allocation systems are also costly.

Many manufacturers also fail to plan for the tax impact of large equipment purchases or don’t structure their operations to take advantage of available manufacturing incentives.

Yes—if you pay individuals or unincorporated businesses over $600 for services like equipment repair, contract manufacturing, design work, or consulting, you need to issue 1099s. This includes subcontractors and independent contractors.

Keep W-9 forms on file throughout the year. Missing 1099 filings can result in penalties and trigger unwanted IRS scrutiny of your business relationships.

Absolutely. Manufacturing equipment often qualifies for immediate expensing under Section 179 or bonus depreciation, allowing you to deduct the full cost in the year of purchase rather than spreading it over several years.

The key is ensuring the equipment is used primarily for business and properly documented. Plan these purchases strategically to maximize tax benefits while supporting your production needs.

If your gross receipts are over $1 million, you’re in CAT territory. It’s based on gross income—not profit—so even if you’re breaking even, you might still owe.

Keeping track throughout the year helps avoid a surprise bill.

It’s different from income tax, and the rules can be confusing, so it’s worth staying on top of.

Adding employees creates payroll tax obligations, workers’ compensation requirements, and additional filings. You’ll need to handle federal and state tax withholdings, unemployment taxes, and provide W-2s.

Manufacturing employees may also qualify for certain tax credits, and proper classification is crucial—especially for skilled trades or technical positions. Family members working in the business can offer tax planning opportunities if structured correctly.