Wisconsin is one of the country’s most productive manufacturing states. To boost that activity even more, Wisconsin manufacturers are receiving significant tax incentives to keep this work in Wisconsin. A new law that took effect in 2013 allows manufacturers to take a credit on profits from manufacturing in Wisconsin. The credit has been phased in from 2013 to 2016. This year the credit will be fully phased in and be equal to 7.5% of Qualified Production Activities Income (QPAI).
As a result, in 2016 there is the potential for manufacturers to offset almost all of their Wisconsin tax liability (Wisconsin’s top corporate tax rate is 7.9% and the top individual tax rate is 7.65%) from manufacturing operations.
The credit is allocated to shareholders, partners and members in S-corporations, partnerships and limited liability companies. The credit is available to manufacturers that derive QPAI from property located in Wisconsin that is assessed as manufacturing.
What is Qualified Production Activities Income (QPAI)?
It is essentially your Wisconsin profit from manufacturing operations. More specifically, QPAI is equal to manufacturing gross receipts for the taxable year less manufacturing cost of goods sold, less direct costs allocable to the receipts, less apportioned indirect costs (the apportionment factor is based on qualifying and non-qualifying gross receipts). Further adjustments might be required based on the manufacturing process, its location, and assessment status. The resulting QPAI is then multiplied by the credit rate in effect for the taxable year (as stated above, 7.5% for 2016) in order to arrive at the total credit.
For purposes of the QPAI calculation, production gross receipts are sales from the lease, rental, license, sale, exchange, or other disposition of qualified production property. Qualified production property is personal property manufactured in whole or part on property that is assessed as manufacturing.
Find out if your property is assessed as manufacturing
Visit the Department of Revenue’s online manufacturing assessment role at: https://ww2.revenue.wi.gov/RETRWebRolls/application. If you do not find your company’s name on this list, you likely do not currently qualify. You can apply to qualify for classification as a manufacturing establishment by filing Form PA-780 Questionnaire for Potential Manufacturers with the Wisconsin Department of Revenue Manufacturing & Utility District Office.
The manufacturing assessment classification must have been approved in 2016 in order to claim the credit this year. The application to obtain the manufacturing certification was due on or before March 1, 2016. If this date was missed, late applications are not accepted. Submit Form PA-780 by March 1, 2017 in order to obtain approval for next year. Also, keep in mind that property assessments can change each year. So, verify that your property where the QPAI is generated is properly assessed as manufacturing annually.
Business owners should note that even though service and installation charges are generally tied closely to the manufacturing process, they do not qualify as gross receipts for purposes of calculating the credit. In situations where a business receives both qualifying and non-qualifying gross receipts, adequate records must be kept in order to report specific receipts from manufacturing.
The credit offsets Wisconsin alternative minimum tax and is nonrefundable
Any amount not used to offset current Wisconsin income tax liability may be carried forward for up to 15 years. In addition, the amount of credit computed (but not claimed) must still be reported as income in the following year. This is true even if the full amount of the credit is not used to offset a current year tax liability and the credit is carried forward to future years.
The credit is also available to agricultural producers
However, insurance companies cannot claim the credit and QPAI does not include income from any of the following:
- Film production;
- Producing, transmitting, or distributing electricity, natural gas, or potable water;
- Constructing real property;
- Engineering or architectural services performed with respect to constructing real property;
- Sale of food and beverages prepared by the business at a retail establishment; and
- Lease, rental, license, sale, exchange, or other disposition of land.
This article is intended to provide you with the basics of Wisconsin Manufacturing Credit and make you aware of the potential opportunity for significant tax savings in 2016 and future years. The calculation and reporting of the credit can be quite complicated. If you would like to discuss further details or have specific questions, please contact us.
