I could free all of that up and take an additional deduction on my 25 return for everything that I still have sitting at in my capital account. 22 on. So 22 through 24 and I can expense 25 again if I would like. So I could have four years, a little less than four years of my R&D cost that I can expense in 2025 should I want to. Welcome to Buy the Numbers. Each week we'll explore the numbers that drive your business from accounting and finance to operations in the exciting realm of mergers and acquisitions. Whether you're a seasoned veteran or just starting out, our discussions will equip you with the insights and strategies you need to rate in the power of data to elevate your manufacturing company. Let's crunch some numbers. Dylan, Julie, welcome. Thanks, Mike. Appreciate you having us. Yeah, so Dylan, you're an old pro by the numbers. You're on about a year ago. Happy to be back. Yeah, and Julie, this is your first time, right? First rodeo. Is it your first podcast ever? It is. Wow. Okay. You might get some street cred. I love it. Not much. I'm going to be like the next internet sensation. Yeah. If you make just the right blupper, we'll make you go by. I'll do my best. Dylan, why don't you remind the glisteners who you are and then Julie, you can tell everybody who you are. Perfect. Thanks, Mike. Dylan Valentine. I'm a principal at CLA here in Minneapolis. Primarily work with manufacturing business owners working throughout the year on tax compliance and any tax consulting needs they have throughout the year. And I'm at Julie Homes. I am a technical director here in our Minneapolis CLA office. I think that this a lot on the R&D tax credit that I also work with, appreciation, cost segregation, accounting methods on occasion, but work with a whole host of industries and clients. A lot of those other clients. The others. Yeah. Yeah. And there's a lot of value in a lot of those. So I'm anxious to talk about a few of them. So 2025 was, you know, I think Dylan, when we talked last year about this time, we were kind of talking about some of those things you can do now for, you know, the return you're getting at a file. And then of course, midway through the year, we had the one big beautiful bill hit that changed a lot of things for 25 and more going into 26. So let's kind of start there. I mean, I, you know, just this, like between last week and this week, I think every CPA I work with has reached out to me with the prepared by client lists and all that type of stuff. And of course, I know what I've done in the past, but I also know things have changed. So what types of things should people be thinking about and talking to their CPA about and stuff, kind of based on, you know, still thinking about 20, 25 returns? Yeah. I think one good place to start where if people fit into that small business taxpayer bucket that if you had a pretty strong year of collections or a long or a strong AR collection at the end of the year or that AR balance is contained to grow and you're on the accrual method of accounting, considering that switched a cash method could be a good tax savings for 2025, you know, or into 2026. You can still file that accounting method change with your 2025 return. So that's always a good planning opportunity to consider if you've, you know, you're looking at a project to tax liability and that we weren't prepared to pay, that could be one way to mitigate some of that tax exposure on the front end. Maybe it's a better method for you going forward. You're not required to stay on it forever. It's a five year period of time that you could switch back if you really wanted to be back on the accrual method or if you went above that gross receipts threshold and required to go back on, I think Julie is a 31 million for 21 or 24 or 20 size. Yeah, 30 million gross receipts for, believe it, 25 inflation. So if you were to go to cash, like Dylan mentioned and then you happen to cross that threshold within a five year period, you would be able to switch back, we'd have to switch back to a accrual at that point when you exceed that gross receipts threshold. Let's dive just a hair deeper there and I'll make sure we get in the show notes of this episode. We recorded an episode on this with your team back in the fall, I think maybe the kind of cash to accrual. So we'll get that episode linked. But let's recap that briefly. Okay, so 31 million is my limit. So if I'm under that, this is an option. If I'm over that, it's not. I mean, I know myself probably like a lot of people in our business. We essentially generally follow accrual and the conversion to cash is going to show because so Dylan, you pointed out if my receivables climbed a lot at the end of the year, right? If I switched to cash, I'm not going to show that income come December 31st, correct? Correct. That would be the or whatever's on receivables. Yes, the counting method, the way it would work is you look at a point in time for what you're beginning of 2025 would have been to start your baseline on the cash method. So what is your accounts receivable, accounts payable and any other accruals, things like that would be factored into the calculation, 1, 1, 25. That would be your what's called the 481A adjustment, which is your typically you would choose a favorable adjustment if you're going to make that switch to cash. So it would be a deduction on your 25 return and then that starting point. So if your starting AR was a million dollars at 1, 1, 25 and accrued to 2 million, now on paper you've created a million dollars of revenue under a cruel that you haven't collected yet. There's a lot of in between during the year, but you have a million dollars you haven't collected yet. So you would have a million dollar reduction on your 25 accrual, the cash income. If we're only just focused on the accounts receivable change, but that's how that would change and then it could flip the other direction and if you're following, but that would be the thing to look for if you had a big growth in your accounts receivable and there's not too much movement in your payables or accruals that could be a favorable adjustment for you. In manufacturing, growth is an accidental, it's engineered. But a lot of suppliers are still building their pipeline on outdated lists, inconsistent follow-up and hope-based marketing. Hoping their website will somehow bring in leads. 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But if you were average to slow all year until, say, fourth quarter and you have a bunch of net 90, net 120 customers and all of a sudden your AR, you did a ton of work, but you didn't collect any of it. You're going to pay taxes on that if you file a cruel, flip that to cash, and it's essentially like you didn't collect that work, so it didn't hit your books until you collect it. But then you're going to start 26 on a high note, right? On your books. Right, that effectively pushes it out a year until you collect it, and then maybe you get to the end of 26 and you're in a similar boat where, okay, it still didn't change too much, or maybe I pushed a lot of collections into 26, and now I have to pick that income up now in 26. So it is a timing element, like a lot of the accounting method changes typically are. Can't defer forever, but it is a good way to consider pushing it out a year or facing that revenue recognition with your cash collection if you're a small business taxpayer. And you can change that every five years, right? Correct. So I would say for a lot of people, I mean, I know our industry in general becomes very cyclical, especially depending on what industry you serve. So like I do a lot of oil gas energy, we're very cyclical with the price of a barrel oil, which tends to kind of be on its own pattern every year or every four to five years. So someone really smart, like you guys could probably look at a history of my business and say, you know what, this isn't the right year, but maybe next year is, and then in five years we're going to plan to switch back if nothing changes and probably play that out pretty well again to defer to fur as much as you can, right? Yeah, definitely. Without getting too far into the weeds and something to talk about your, talk about with your CPA is if you have a lot of companies that are under similar ownership, you need to generally aggregate those companies together to calculate that.
that 31 million. So if you just have standalone companies, but all the ownership is considered common, you may not be able to qualify. So just one caveat out there to keep in mind. You probably recommend reviewing that every year, right? Like just is this the right timing for it? Definitely. So that's a good first one. What else we got? I would say somewhere in the bucket of things that haven't changed when we think about the bill. That was a big topic during the summer and throughout the end of the year with the one big beautiful bill. A couple things that didn't change that are generally favorable for taxpayers and business owners is that rates did not change. So I know we're maybe thinking about things that people could do, but this is also one favorable thing that rates were scheduled to go up. Qualified business income deductions were scheduled to go away in 2026. And that is now here to stay. So when you think about your pass through business owners, their effective tax rate at the top end, if it's all qualified business income is generally 30% for federal. If QBI would have went away and the rates would have increased, they would have seen close to a 10% rate increase on their federal income with QBI went away. So nothing that anyone needs to do, but I like to call that one out because that is a significant change that was put into place that saved a lot of those pass through business owners almost 10% on their top tax rate. Yeah, 10% is a lot of a ton. What about, I mean, I know that and I can't remember off top my head. Again, we need to link to the one big beautiful bill episode that we recorded last spring, early summer, something like that. But remind me against some of the things that did change as it relates to, you know, I know a lot of people towards the end of last year were buying equipment and so forth. And I think we had a return of bonus depreciation was active 2025, right? Yeah, bonus depreciation was reinstated effective January 19th of 2025 and that is now up to 100% bonus depreciation. So January 19th date is an important date and maybe Julie, you could walk us through that one. So January 19th being inauguration date, right? So anything acquired and placed in service after January 19th of 2025 would be eligible for 100% bonus depreciation. You know, the trick with that is that acquisition piece, right? So we just got to notice last week, I think that talks a little bit about what that acquisition date means. If I'm buying long term construction property, right? I have building a building. When did I start construction? Is it after January 19th? Then I'm good for 100% if it's before then I am in under that tax cuts and jobs at phase outs. I could be at 40% bonus as opposed to 100% or if I put in a big P.O. for a bunch of equipment before January 19th, I still make get stuck with 40% bonus depreciation. So it's even off the P.O. date? It can be at the P.O. date. It can be at the date in which you start construction with substantially starting construction. There's a lot of different nuances that relates to that acquisition date, but it's usually when you've entered into a written-viding contract. If I bought a $300,000 piece for equipment in August, then you get 100% bonus depreciation. You can take the whole thing. That's been a tax strategy. I mean, this industry is so capital intensive with the equipment that we purchase. That's been a long-term tax strategy for a lot of folks on the equipment front, on the equipment in for sure. Now, let's talk briefly on that because I do think it's something that people sometimes may be misunderstand. Let's say I bought a million dollars worth of equipment this year and per my books, I made $800,000 without the depreciation. I'm going to get to take that million dollar loss or not loss, but expense. I now have a $200,000 loss. I won't go any tax on the operations of the business that year. I get to carry the 200 still. You're still carrying the 200. You're going to be limited. Any NOLs that you're generating are now going to be limited up to 80% on a go-forward basis. You're not going to be able to say if I have another $200,000 of taxable income next year and I have this $200,000 pay-reover, I can only take up to 80% of that, but then that loss, the NOL will continue to roll forward until you can free it up. So, $160,000 that will apply to my 2026 at that point? Yeah. And then it, you know, that's in the instance, if we're just talking business operations, right? If I'm an individual, I could be limited. If I'm a passive owner, right, in a partnership possibly as to what that depreciation I might be able to use, but theoretically, yes, that's how that would work. I knew there was a limit there. I didn't remember what it was, but I've heard people in the business talk about, oh, it's great, because I'll just carry over this whole loss to, you know, the additional next year. I'm like, yeah, I don't think you understand how this works. You know, it's not that simple. Yeah. And I mean, I think when we're talking about bonus depreciation, you know, the 100% is nice, right? Yeah. And last year in a point where you can't use it all, right? Because now our options are if it's bonus eligible, I could maybe look at section 179, expensive, right? To limit it. But if I'm over that threshold, then I'm just looking at bonus and I can't use all the bonus, it's 100% or nothing in terms of bonus, right? There's not kind of a middle ground in its high class life. So there's a lot of, there's a lot of different moving pieces, a lot of different levers that you can look at to make sure that we're getting that number as close to zero as we possibly can. So we're not stuck with an a while that's going to carry with us for years to come if we're not able to use it. As I know, some of the listeners are, because we've had this discussion many times too, but I know some of the listeners are in that stage of selling their company in the next three, five, seven years, something like that too. You know, talk with your CPA about that too. I mean, you take all that depreciation now. You're now sitting with zero basis in that equipment and then you go to an asset transaction and sell all that equipment. You're going to be paying full boat. One of the thoughts on that too. I think we've talked about this before, Mike too. In a similar way, think about tax, about paying it over the lifetime of your company or just your life in general. It's okay to drive down tax income below zero in a certain year, but you will eventually pay for that in the future of income before depreciation stage. They're relatively the same. So maybe it's not driving it down until loss and we're paying at a reasonable effective tax rate that we're okay paying some income at for that year and saving some of those deductions for the future. But obviously, time value money is another thing too to weigh into that equation. But yeah, there's all kinds of different ways to slice and think about it and the sale element is certainly one to keep in mind too if that's in your horizon. Yeah, no, I'm glad you said that because I'll go ahead and put my disclet my personal editorial on taxes in here now and you guys can agree or disagree with me, but you know, there's nothing we're going to talk about that is going to prevent you from ever paying taxes. It's going to be deferring when you pay the taxes and then as Dylan just pointed out that can be a whole another game. If there's an administration changing three years now and we're projecting that taxes are going to go up like crazy, you might want to pay those taxes now instead of later. So there's again, a lot of it's timing, a lot of it's good luck. But the important piece is having people like you in your corner to help you figure out just what's the right decision because you're never going to not pay the taxes, right? It's just winner you're going to pay them. What else we got? So there's I mean, again, I'm sitting here late January and going, what can I do? I did okay last year. So let me put this scenario out to you because I think this is a pretty general statement across a lot of the, you know, precision manufacturing industry. Most people had a decent year. It wasn't like tremendously great and it was not tremendously bad. It was relatively flat. A lot of people did make some capital investments trying to think what else. I mean, there were definitely industries that did really well. There were industries that did really bad. But if you just look at the data of the industry as general, it is a relatively flat year, right? So there's not going to be any, I don't think most people are probably sitting on any crazy, exciting earnings or losses. It's probably very similar. They've done the last few years. So when you see it, when you see one of your clients come in, it looks a lot like it always looks. You know, maybe outside of what we've already talked about, what else do you look at and go, well, we really need to look at this or that or from my perspective. So 174 capitalization. So if I had research and development costs in prior years, 22 through 2024, I was supposed to capitalize and amortize them over a period of five years for domestic. The one big beautiful build changed that and is allowing for a catch up of any unamortized amounts 22 through 24. So if I've had a lot of those and I get excited on 2025,
Right, I could free all of that up and take an additional deduction on my 25 return for everything that I still have sitting at in my capital account. 22 on through 22 through 24 and I can expense 25 again if I would like. So I could have four years, little less than four years of my R&D costs that I can expense in 2025 should I want to. So I will and if I've been running flat, right, that's a lot of additional deduction that I could be running through my 25 return that would then push me into that NOL to get limited. So I think the initial gut that we've seen with a lot of companies is, well, yeah, I want my money back for 22 through 24 is a pain in the butt. I think we this sooner rather than later, but I think there are options you don't have to take it all in 2025, split it between two years or you can keep letting the amortization run. And that amortization running I think is actually going to be the most popular to limit how much of NOLs we're pushing through. But I think that's kind of, you know, if we're not on top of it, if we're not having the conversation, if you're not talking to your CPA, but what do I do with that 2025 is the year when you put it on your 25 return is the year you have to decide. So there's a lot of play around little wiggle room just to make sure you're thinking about that before you sign your return. I know our industry way underutilizes our ND tax grades. I just know that from talking to folks and just not enough people are using it. So let's define that for like this industry, you know, so precision manufacturing. And you correct me where I'm wrong. I'll try to summarize some of this. But every time I get a new job from a new customer and I've got a program that job. I've got to create work holding for that job. I've got to just generally figure out how I'm going to make it. So like, so I've got a planning phase. I've got a programming phase. I've got a fixed ring phase. I've got tooling costs maybe. Just in those four things alone. Nearly every, especially every any new job that rolls through my shop. That's R&D, right? Can be. Yeah, I think one of the big caveats for this industry is making sure that we know who has the economic risk. So if you have a customer that's coming in and paying you say, I'll pay you time and materials. I need you to make this for me. Right? And you know, you're going to get paid no matter what. If you make a mistake along the way and fix during didn't go the way you want it to, you're going to get reimbursed for that. Then it would be the customers R&D. But if you're not, right? If you give them the fee quote and say, this is what it's going to take for me to make this for you. When you take the risk, you own the design. You have to work through what's the right process. What is the right design? Are these the right materials? I have some sort of uncertainty that I have to test for along the way. That's R&D. So I'm trying to give as many examples as possible to listeners so that they go. So this the light bubble go off form. So, so if I have, which I do, I have a manufacturing engineer that is only responsible for new parts. That's all he does. Figures out how we're going to run it, all that type of stuff. Essentially, let's say I haven't had him. Like in lots of, in a lot of cases, that might even be the owner of the company. Right? Now, this what I'm getting ready to say doesn't really count if it's owner, but in my case, I have someone that does it. So, but I haven't, maybe I haven't had him log every minute of his day to R&D. Right? But I can safely tell you that 85% of the money he made last year was doing R&D. That's one simple way I can capture his the expense of that, right? Yeah, and I think, you know, a lot of the questions we get on documentation is what do we need? And pros and cons is there's no bright line from the IRS. So, what that looks like, right? Would we love to have time tracking detail for every minute of everybody that's doing R&D? Absolutely. Do we get that? No. Right? I mean, there's a fine line between even the time tracking detail that you get. Is it accurate? And do you think this appropriately represents their role and what they did during the year? There's estimates that are made. It's just wondering, you know, what is the reason for this? It's a lot of telling the story of what is your day to day look like. Tell me what you do when you get a new job in. What does that process look like? How long does it typically take? Who all is involved? How many times do you have to go back to the drawing board? Do you, right? I know you like to say you're all 100% all of the time, right? But it's, you know, what are all the different things we have to try and troubleshoot the one. Hey, everybody, what do you think of when I say O.T.D.? Well, in making chips, we've got lots of acronyms to deal with. But O.T.D. is on time delivery. On time delivery is part of Hill's mission. Deliver quality parts on time every time. When I was shopping for an ERP system, I was looking for something that would ensure that we do that on a regular basis. Delivering jobs on time was something we struggled with. And I know that most shops struggle with. I think I saw recently that 70% of shops struggle with delivering parts on time. So the best decision I made in that inner pro shop. Did you know that many approach shops customers quickly experience 95% or better on time delivery rates with their customers? And now pro shop has a guide to help all shops whether you're using pro shop or not. Visit pro shop ERP.com/95 again that's pro shop ERP/95 to get your copy today. So then I've got other, you know, I've got other people that maybe spend 20% of their time. So we've been in business for 50 years this year. We have some parts we've been making for 50 years. That because of new machines, new workholding stuff like that, we say, you know what this part that we've been making for 35 years. Would really run better now on this machine. But we got to start over, right? I mean, we got to figure out a new way to hold it. We got to tool it. We got to program it all that. All that would qualify as well, correct? And products, processes, changes in functionality, enhancements to the product. Even if you're making the same part with them different material. Yeah. Okay. There's testing from there too. There's uncertainty. Is it going to work the way I want it to? Okay. So again, R&D does not mean lab coats. I know a lot of people just think I don't do R&D. That's fancy stuff, right? But we do. So let's say I go look at that and I'm spending, you know, I spent, well, let me go back to your risk question. So if, sometimes we price in that stuff into our customers and sometimes we don't. Right? Sometimes like again, we know where if we win this job, we're going to make this part for 10 years. They're going to order 5,000, you know, whatever it is. And in those cases, we absorb all that in our E costs that we call it non-recuring expense. We absorb that as an investment in this job. That would qualify. But if I bid a job and all those costs are layered into it, that job would not. Is that correct? For the most part, I mean, we tend to look at the contract language and see what do we have going on? Who holds the risk? Right? I think you can build in what you think is going to take for tooling and fix during. And if you're not going to charge them if something were to go wrong, even though you had a number in there, maybe we can look at the delta. Right? What was that out of scope that wasn't a change order? Right? That we can include within R&D. So it's a lot of that contractual language of figuring out who's cost is this. And if a lot of folks in our industry, and I believe this is probably a true statement, when you say in the contract, we go, well, we don't really have a contract. But we do, right? We send a quote, we got a PO and there's terms in both. You got a quote, you got a PO, there's terms on the PO, right? As to who's responsible for what, how are you going to get paid for what? Right? Is it just the production? Is it the design? You know, what is that PO state? Like in our quote template, it defaults to say that all, all non-reoccurring expenses are the property of hill manufacturing. That's a clarifying statement in our contract with the customer that this is my cost. I'm taking on and I own it long term, right? And I think that's very common for probably most of the listeners. I think that's why I'm just trying to give some clarifying questions so people don't go. I don't think that relates to me, but it does. Yeah, and I feel like, you know, anytime we get into custom manufacturer or custom tool and die, unless you're working with, you know, a massive kink calomerate that owns everything and you're more of the service provider, right? They're giving you the designs and the specs and you're just not saying just figuring out how to make it. But even then, we could be looking at your process. How did you figure out how to make that even though you didn't own the design, right? You figured out the process of the manufacturing and that in and of itself could be already. Here's another question. So, and this one, I'm not 100% sure I know the answer to that. If I, so for example, our company last year, we bought another shop. We've integrated them as part of that. We spend a lot of time and effort and money integrating new processes into both of our organizations.
the one we bought and our existing organization to process things differently, to do a lot of things differently. In my right there's some faction of even that's R&D within my own organization, right? Comey, yeah, it's really looking at, I have uncertainty that I'm trying to solve for, and to solve for it I'm going through some sort of process of experimentation to figure out what's the right answer, right? I think if I'm trying to, it gets a little bit scary if we're talking about software, then what does that look like, right? Is it a data dump and just manipulation of data or is it truly figuring out what's the most efficient way to operate? And we got to figure out how we're going to tweak our machines, or if there's a different tool mechanism that's going to make more sense, or how do we leverage capabilities from two different areas into one, right? I mean that certainly could be R&D. Julie, that's a great summary of R&D. And I would say if you're not sure, right? Have a conversation, phone, have somebody that's, you know, in facilities a lot of times talking to, the people that are out on the floor that know what's going on in a day-to-day operation, we have a conversation with them, say, "Tell me what you do." You know, what happens when a customer calls and they need any product? What does that look like? Tell me what that process looks like, and we can help figure out, is there R&D there, and if so, where do we look? You know, another example that I know we kind of came across, that I don't remember if it was last year or the year before, I was like, "Oh my gosh, we missed a smart D there." You know, we've, over the last couple of years, we've implemented a lot of different automation, right? So we've got maybe a machine-tending robot or something like that. And we, you know, that thing didn't just hit the floor and we knew how to use it, and knew how to make it work for our parts, right? There were, and still today, there's parts, like I mentioned earlier, we've been running for 30 years, we say, "Hey, we could run that on the robot." But it takes, you know, maybe a couple of hours, that first time we're going to run on the robot, to dial in the robot, right? And learn, like, do we need to change the way we're holding this part? Do we need to change the way we're running the part? Whatever that might be. So, I mean, I guess my encouragement to anybody out there with a shop that's trying to think about taxes is just think about everything new you did last year. Make that big old list, and then, like, call Julie and say, "What of this qualifies?" I'll start with, "What gate, you know, what was an absolute nightmare last year?" Yeah. Right? It did not go according to plan. As much as it stings from a business perspective, a lot of that's really good fact pattern for already, because it did not go according to plan. Yeah, where do you think something was going to take an hour, and it took a week? It took a lot longer. Or more, right? This did not go as planned. And that's going to, for sure, is for something that we can start a conversation and figure out, you know, where we can leave that. What about, like, I mean, I was just thinking, like, last year, it might have been the year before, but I didn't thought about this, but, like, we do quite a bit of welding and fabrication work as well, and we bought a new laser welding machine, which is relatively new technology. I mean, I don't know this new technology. It's relatively newly adopted technology. And, you know, I had to put all my welders through a couple days of laser welding training. These are trained welders, but for a product line, or for several products lines, product lines that we're delivering, that laser welding was better. I had to put them through, you know, a good couple days of learning to make the proper weld with the laser welder. How does that go as far as, like, training on something totally new like that? Training doesn't, it's harder to qualify. Okay. It's really looking at what is that process of experimentation, what's the uncertainty that we're solving for, right? Figuring out to that point that this is the way we're going to do it, and that would be R&E, but once we're getting people trained up for production, that moves kind of more into the products. So in the scenario I'm talking about, when you say it that way, when I look at it, I go, okay, there was only a trainer on site for one day, teach everybody how to do it. The next day, they were figuring out how to make it work for the product line that we did. Day one training knows, day two figuring out how to implement that into our process. Yeah. Essentially. Yeah. I mean, I kind of think of the R&E happens before we are saying, we're good. Let's run production. Got you. Right. And then once I've done production, if I'm saying I can make this a better way, or what happens if we tweak this, then we're back into R&E again until I get the thumbs up that work out for production. Okay. Yeah. That makes perfect sense. What are we missing? What's what money am I leaving on the table? I'd say there's maybe a couple other categories who may not be able to go fully in depth on it in the last few minutes, but when you're talking about looking at the scenario, the year was pretty similar to the last few years, maybe some had growth, but in a year of tariffs and rising costs, life, inventory methodology, it would be a good one to consider if, you know, you're the last inventory that you bought that's still sitting in inventory is the most expensive piece of inventory you have. That could be a good method or discussion to talk with your CPA on, to see if it's worthwhile doing. And, you know, the caveat with life, is it needs to be your book method as well as, you know, in addition to your tax method. So that can trip people up sometimes where you can't do it because, hey, we're going to stay on FIFO because that's just what we're going to do for books and life was not an option for us, but anything else you would maybe add to that Julie on the life, oh, discussion. I don't do so. I think that's that was a good time to talk about life, oh, I mean, I think if we are a larger taxpayer, that subject to you and a cap, right? I think any time that there's a year where we have some additional deductions coming in, bonus depreciation, 174 is now a time to raise the ugly 263-cap-a conversation as to whether or not we're doing that correctly or not. If it's going to be an unfavorable adjustment, it might be a year where I have sub-detections to offset it. You know, that's such a great point. That's, you know, that's something I hadn't thought of for you just said it, but yeah, I mean, if you're going to have that carry forward loss, like what a great year then to make your other adjustments where you still maybe end up at a zero. Right, or, you know, are there any skeletons in the closet that now's a good time where I have the deductions to offset it where if we're going to clean it up, this might be a good year to do it. That's a great point I hadn't thought about that, but because I'm expecting that I'm going to have a, again, I bought a shop, I bought some equipment, my R&D, like I'm going to have. It's a lot of cost study in there that you could offset. Yeah. What makes sense is that timing of when I take those, or is this the year that, you know, that pesky project that's been sitting on the backburner for a couple of years, and I know I've had to deal with it, but I don't want to. It might be a year to pull that trigger and get it all cleaned up without much of a tax impact. Yeah, that's such a great point. I hadn't thought about that. The other one would be, I know Mike, you had mentioned, bought another shop, and I know we've talked about cost segregation studies before too, and we can give a quick rundown on that, and I think there's another caveat or a new breakout of cost segregation studies that Julie may want to dive into as well, but in general, the cost segregation study, bought a new building, or a building, a new building, and you've got the overall shell that's there, the land, and then for manufacturing companies, you've got a lot of electrical components, hoods, other things that are related to the manufacturing process that are other leasehold improvements that maybe you did after the building was placed into service, that could qualify for a shorter tax life, and then maybe we're talking more about bonus depreciation, like we were talking about earlier, that you're able to speed up the deduction for this long life asset. If you're looking at your balance sheet and you have millions of dollars sitting in the building account, and hardly any in the personal property or shorter life assets, that's a good flag to raise and say, hey, maybe we should look at a cost segregation study, but maybe Julie, you want to touch on the new components of qualified production property? Yeah, and I'll just say, you know, cost, you don't have to catch it in the year that you placed in service. So if I'm looking for additional deductions, I want to look back on my balance sheet, and see, do I have one big lump at 39 year? I probably have some additional depreciation deduction or deductions, and I could speed up, if that's something that I need. The one big beautiful bill also graced us with something called Qualified Production Property, specifically for manufacturing areas, where once we've done the cost, and pulled out those equipment related items for the electrical, the HVAC components for our manufacturing, the rest of that manufacturing space, once they take out bathroom offices, R&D, I can expense all of that in the year I placed in service, even though it's out of 39 year, we have a repair in it with the Qualified Production. Why didn't you realize that? That was a very good production, yeah. Wow. So again, another huge benefit for manufacturing manufacturers. So if you're again looking at, you know, building a building, I would say, in 2026, really, 2526, that is something that needs to be, that's an election that has to be made in the year it's placed in service. Is that true buying a building also? No, it has to be consp- well, it could be. If you want to see some of the acquisition rules there that make it a little new once, there's a potential you could get it with purchase.
the other caveat is that the operating entity has to hold the real estate. As we know it right now. We're waiting on guidance, but you know a lot of times you have a structure where I'm going to have a real estate entity and an operating entity for liability purposes to get that qualified production property. I would need it to be in the operating entity. Hey, it's Paul from Making Chips. If you've been burned by recruiters who don't understand manufacturing, you are not alone. That's exactly why we created higher MFG leaders. We're not just recruiters, we're current and former shop owners, and we know what it takes to lead in this industry. Whether you're hiring your next operations leader, sales manager or production supervisor, we'll help you find someone who actually fits. Learn more at makingchips.com/higher. So wrapping up, here would be my take, especially based on what you just said. Have a relationship with your CPA. Talk to them about your plans. Talk to them about things. Because I mean when I heard you just say about like this piece of real estate, maybe if you're buying it. Right. I need your guidance, maybe structure in my contract correctly, or what entity I buy it in, or whatever. Right. So, you know, we've talked about this for a long time. I mean, you know, having a relationship with your CPA, having a relationship with your banker. You know, communicate. Use, you know, use this team you've built around yourself to make smart, intelligent decisions that, you know, yes, maybe you're tax efficient or save you money on some financing on a back. Whatever it is, you know, help, might help you word how you send your quotes out so that all of your NRE expenses, your capturing as R&D dollars versus you don't have that in your quote. And now you can't capture that. Right. And that's probably always my biggest frustration. I do get a lot of people reach out to me and say, hey, you know what? I don't, I'm using the CPA that my dad knew that, you know, lives down the street or something like that. And, you know, I think so many people, especially small businesses, I won't say are stuck with a CPA that's inadequate or anything. But I mean, it feels that way, right? Like, because they're checking boxes. Taxes are just purely a compliance thing for them. And they're filling out the forms and their tax software and just not getting, not getting any guidance on, you know, potentially how to do something smarter. And that's why I always appreciate CLA is always so great to jump on here and offer guidance to the listeners. And a lot of listeners have reached out and for connections to different folks from CLA and you guys are always so responsive to them. I appreciate as the host take care of my listeners, but that's probably the biggest thing I would tell listeners from this conversation is, you know, just build that relationship with, I mean, you can see here, like Dylan and Julia are super smart. And they've seen what you're doing. They've seen how you're doing it. They've seen where you're maybe doing it right and where you're doing it wrong. And they can help you, you know, get yours right. You can go back and you can refile it. If you made a mistake a couple of years ago and it's worth it, it might be worth refiling and recapsuring a couple of hundred thousand dollars in expenses or something like that. There's a cost to it, but it can have significant impact on your business and your tax liability or lack thereof. And I will just say, you know, from a specialty tax perspective, I do work with a lot of outside CPA firms that are smaller and don't have the capability. So if you have questions, I would say reach out to your CPA, right? See if they have a connection. If they don't, we're always happy to take a phone call and walk through your questions and how we might be able to help or point you in the right direction. But make sure that you're having that conversation there first that you're building that relationship and that's the right relationship for you. Yeah, what I always recommend anytime we have you guys on is, you know, forward this episode to your CPA and say, "Hey, I want to talk about these things." And if any of it's relevant to me and if, and as Julie said, you know, there might be a contact down the street that they have a relationship with that you can work on these things. If not, I mean, I can put you in touch with Julie and Dylan here and the CLI team. I've, there's several listeners that have reached out and I think are actively engaged with you guys now on a lot of their business and everybody I've talked to is super, super happy. But yeah, this is just good valuable stuff you need to know to really run your business efficiently and, you know, not pay too much, not pay too little. You don't want to pay too little either. I mean, that's worse than paying too much in my mind. I'd rather probably pay too much than too little and have to answer for it. But, both of you, thank you so much for your time today. I know people will get some value out of this and I will certainly connect if anybody reaches out. But if they don't, they want to reach you directly. What's the quickest easiest way to find you guys? Dylan.Valentine@CLIConnect and we can put that into the notes of the podcast and can provide our contact information.
[email protected] And we'll tag both of you guys on social media on this too so they might find you through LinkedIn or, and then again, if you can't reach out to them, if you can't find them, email me, contact me on social media and I'll make a connection. Both of you, thank you very much. I appreciate it. This is good, timely information. I should help a few folks. So always good. I appreciate you. Thanks Mike. Take care. [Music]
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