With most industries, navigating the impact of tariffs continues to be an important topic in the manufacturing industry.
This article delves into some of the impacts of those tariffs and some tax implications on the Sec. 41 Research and Development (R&D) Tax Credit and Sec. 174 research and experimental (R&E) cost capitalization.
Tariffs can contribute to higher input costs for end products, which may lead to increased prices for end users if companies choose to maintain their profit margins. As a tariff is a tax on importing goods, US companies can avoid paying tariffs by removing the need to import by investing in domestic production. That said, certain tax provisions may help offset some of the additional costs associated with tariffs
As tax law currently stands, companies are required to capitalize their R&E costs and amortize them over five years for onshore research and 15 years for offshore research. If US companies move their manufacturing production onshore and begin realizing these R&E costs, they will be able to utilize tax deductions quicker, which will reduce their income tax liability.
Further tax benefits from onshoring labor are outlined in the Sec. 41 R&D Tax Credit. As offshore research is not able to be capitalized into the R&D Tax Credit, companies that decide to move production and research onshore will be able to capitalize more costs into their credit, and as a result, recognize a larger tax benefit.
U.S. tariffs continue to have broad implications for the manufacturing sector. As these tariffs remain in effect, rising costs are prompting companies to explore strategies to lessen the impact. Potential avenues for relief may be found in Section 41 R&D Tax Credits and Section 174 Research & Experimentation (R&E) capitalization.
How Can Schneider Downs Help?
To learn more about available tax benefits and credits for manufacturers, please contact our R&D Tax team at [email protected] or download our R&D Tax Credit for Manufacturers fact sheet.
About Schneider Downs Manufacturing Services
Schneider Downs understands the manufacturing industry from a regional, national and international perspective. Our experience in engineering-based cost segregation studies, state and local tax services, including nexus studies, as well as research and development tax credits, provides manufacturers the expertise needed to run their businesses more effectively.
To learn more, visit our Manufacturing Industry Group page.
