For manufacturing businesses, production is just one side of the equation. You need to master several other components as well, including costs, margins, suppliers, deadlines, compliance and manufacturing business taxes.
Many business owners often pay little attention to manufacturing tax compliance until a notice comes up, or an audit happens. Manufacturing accounting compliance is not just a finance department headache, it spreads to all departments. We will now discuss manufacturing tax compliance in detail and why ignoring tax challenges in manufacturing companies can be expensive.
Why Manufacturing Business Taxes Can Be Complicated
Understanding manufacturing business taxes may seem easy on paper, but in reality, it is quite complex. You’re simultaneously dealing with a mix of taxes such as:
- Sales Tax
- Use Tax on Purchases
- Taxes on Machinery and Equipment
- Import or Export Duties
All of these taxes are calculated differently and are almost unrelated to each other. It’s also difficult to understand and work out on which items you need to record your taxes. You may believe the new machine you purchased is subject to taxes, but turns out it isn’t. These types of confusion invite manufacturing tax compliance issues.
Manufacturing accounting compliance is more than simply record keeping, it’s important to determine which taxes apply where and why. You may consider outsourcing your manufacturing accounting compliance to external accounting services.
Inventory: The Starting Point Of Manufacturing Tax Compliance Issues
If there’s one area that causes the most headaches, it’s inventory. Inventory is normally fast moving and keeping records up to date can be difficult. Inventory tax accounting manufacturing rules expect you to be consistent.
However, inventory are typically purchased at different prices and volumes, production batches are not always uniform, and waste is quite normal. To complicate it, specific accounting methods need to be used to record inventory valuations such as First In First Out (FIFO) or Weighted Average Cost.
With FIFO, inventory purchased first is used first. With Weighted Average Cost, inventory is valued at the weighted average after every transaction. Different valuation methods offer different insights on inventory valuations. Whichever method you choose, you must continue the same with consistency rather than bouncing back and forth between several methods. If your manufacturing COGS is wrong, it could be due to incorrect tracking of inventory.
Remember, one big mistake is not the only one that can cause problems. Small inconsistencies can accumulate, leading to incorrect tax reporting.
Cost Accounting Compliance For Manufacturing Businesses
A lot of manufacturers treat cost accounting as an internal tool to track profitability, or control expenses. What is important to understand is that your costs accounting directly affects your tax position.
Cost accounting compliance manufacturing is not just about determining your profit margins. It’s also about ensuring those margins are accurately calculated so that your manufacturing business taxes are correctly reported and paid.
Cost accounting is important as accurate tracking of overhead can reveal vital information about your business:
- Cost accounting gives insights into the accuracy of product costs. Incorrect costs can end up in the business underselling and incurring heavy losses on sales.
- Inaccurate costs also mean profits could be either overstated or understated. Understating profits, even unintentionally, can trigger audits and huge penalties.
- With incorrect profit figures, taxable income changes. You also miss out on important tax deductions. Once those numbers are reported, they’re no longer an internal matter. They can now be analyzed by the tax authorities, resulting in notices and audits.
What is Sales and Use Tax
Sales tax is a tax charged by the seller on every sale. This tax is then paid to the government. Use Tax is paid by the buyer when sales tax doesn’t exist, and that can be a problem.
Most manufacturers are careful when charging sales tax to customers, but use tax often gets ignored or misunderstood. You may buy equipment from a vendor who doesn’t charge sales tax. That does not always mean the tax does not exist. It might just mean you’re responsible for it. This adds up to a large sum if you keep forgetting about it. Use Tax is one of the most common manufacturing tax compliance issues simply because it is easy to overlook.
Expanding Operations Rapidly Can Lead To Manufacturing Accounting Compliance Issues
Growth can be exciting. Opening a new warehouse, selling in another region or exporting products can be great for the business, but from a tax perspective, things can get complicated.
By selling in a different location, you may be subject to different tax rules and filing requirements. Even storing inventory in another jurisdiction can create a tax liability there.
A lot of tax challenges manufacturing companies face actually come from expansion that wasn’t fully thought through from a compliance angle. Growth itself is not the problem, being unable to cope up with expanding tax compliance requirements at the same place is what creates the problems.
One of the most difficult tax challenges manufacturing companies experience are the ever-changing tax rules that come unannounced or unanticipated.
New incentives are frequently introduced while old ones are replaced. Without effective tax management strategies, you can easily miss out on valuable deductions. You may end up missing on tax savings or follow outdated rules that understate your tax liability.
How To Keep Your Manufacturing Business Compliant
There’s a common belief that audits are random, but that is not entirely the case. Some specific patterns that attract attention are:
- Numbers that don’t align over time
- Sudden changes in gross or net margins
- Inconsistent reporting
The best way to deal with audits is to prepare your books in a way such that you are always audit-ready. Some important steps to follow are:
- Documentation: Keeping an audit trail is very important. When it comes to manufacturing accounting compliance, careful documentation of sales, purchases, expenses, invoices, bills, etc. are what protects you when audits occur. Documentation of transactions act as proof of occurrence and allow business owners to be able to back their books. Messy or unorganized books can end up making your accounts inaccurate and your business non-compliant.
- Automation: Manually updating accounts can lead to human error and unorganized books. Spreadsheets work when businesses are small with few transactions, but become increasingly difficult to cope up with when transactions increase, multiple locations are involved or when teams grow.
When errors occur, they do not show up immediately and are difficult to track later on.
- Cloud Accounting Systems: Advanced accounting systems such as QuickBooks or Xero offer increased accuracy as they reduce human error, and enable simplified tax preparation.
- Tax Credits: Manufacturers often have access to tax credits and incentives such as R&D related costs. They cannot be claimed randomly, they need to be backed by proper records and calculations. Several businesses end up missing on tax credits or incorrectly claiming them.
- Consistency: Consistency is key for manufacturing accounting compliance. Consistency in accounting procedures such as inventory valuation methods or depreciation methods are important. Also, review your numbers regularly rather than at year-end.
- Outsourcing: Firstly, if you are not outsourcing, ensure different departments have goal congruence. Taxes are confusing and complicated, they change all the time, so it might just make sense to hand over manufacturing tax compliance to an expert.
AccountiPro: The Manufacturing Accounting Compliance Experts
Most business owners have absolutely no time to keep their books up-to-date. Even if they do, they most likely are unable to keep themselves updated with new tax regulations, or may lack essential knowledge to understand the impact of new or existing rules.
That is where outsourcing manufacturing tax compliance to professionals makes sense. AccountiPro is backed by well-experienced CPAs, with exposure in several industries, enabling us to provide expert advice on various tax and compliance matters. We make use of automated accounting tools to organize your books and keep them present. Contact us now to learn more about how we can help your manufacturing business stay tax compliant.
