How a Manufacturer Saved 30% in Taxes Through Strategic Planning
Background:
A manufacturing business based in North Carolina, structured as a C Corporation, had annual revenues of $3,000,000. The business owner faced significant tax burdens, with a combined federal and state income tax liability that cut into the company’s profitability. To increase cash flow and retain more profits, the owner sought effective tax planning strategies to reduce taxes by at least 30%.
Challenges:
The business was primarily focused on reducing federal and state income tax liabilities, which, as a C-Corp, could be
high. The owner also used his personal residence for company events and meetings, presenting an opportunity to utilize the
Augusta Rule. However, the owner was unaware of tax strategies that could significantly lower annual taxes while remaining
compliant.
Tax Planning Strategies Implemented:
The Augusta Rule:
Leveraging the Augusta Rule (IRS Section 280A(g)), the business owner was able to rent out his personal residence to the business for company meetings and functions. Under this rule, homeowners can rent out their residence for up to 14 days per year, tax-free. The owner charged the business $2,500 per event for hosting quarterly board meetings and annual company functions. This allowed him to shift $10,000 per year tax-free into his personal income while creating a deductible business expense.
Research & Development (R&D) Tax Credit:
As a manufacturer, the company was eligible for the federal R&D tax credit. By identifying qualifying activities, such as process improvements and product development, the business was able to claim a $45,000 tax credit on expenses related to innovation and efficiency improvements. This credit directly reduced the company's federal tax liability.
Accelerated Depreciation through Cost Segregation:
The company owned a manufacturing facility and had invested heavily in equipment and property improvements. By conducting a cost segregation study, the business reclassified specific building components and machinery into shorter depreciation schedules. This resulted in an additional $150,000 in accelerated depreciation, which lowered taxable income, creating immediate tax savings.
Implementing a Defined Benefit Plan:
The business established a defined benefit plan for the owner and key employees. This allowed the company to make substantial tax-deductible contributions towards retirement benefits, reducing taxable income. In the first year, the business contributed $120,000, reducing the owner’s personal tax burden and building a future retirement fund.
State-Specific Incentives:
North Carolina offers state tax incentives and credits for manufacturers, especially those investing in workforce training, machinery, and renewable energy. The business claimed a $10,000 state tax credit for investments in energy-efficient machinery upgrades, further reducing its overall state tax liability.
Results:
By integrating these strategies, the business experienced significant tax savings:
Augusta Rule: $10,000 tax-free income for the owner, and a $10,000 deductible business expense.
R&D Tax Credit: $45,000 reduction in federal tax liability.
Cost Segregation: $150,000 accelerated depreciation, reducing taxable income.
Defined Benefit Plan: $120,000 deductible contributions to reduce taxable income.
North Carolina State Incentives: $10,000 state tax credit.
Total Tax Savings:
The combination of these strategies resulted in over $335,000 in tax savings, equating to a 30% reduction in the
business’s federal and state income taxes. This improved the company’s cash flow, allowing the owner to reinvest in the
business and plan for long-term growth
Additional Tax Strategies:
While the tax planning strategies implemented led to significant savings, the business could explore further strategies to
continue reducing its tax burden and maximize savings, such as:
Section 179 Deduction for equipment purchases.
Bonus Depreciation for additional accelerated depreciation on qualified property.
Qualified Business Income (QBI) Deduction (with restructuring consideration).
Employee Retention Credit (ERC) for potential retroactive credits from 2020-2021.
IC-DISC for export-related tax benefits.
Work Opportunity Tax Credit (WOTC) for hiring from targeted groups.
Health Reimbursement Arrangements (HRAs) for tax-free employee benefits.
Captive Insurance Company for self-insurance and premium deductions.
Sale-Leaseback of Business Property to unlock equity while creating deductible lease payments.
Charitable Contributions Strategy to optimize charitable giving with tax-efficient methods