How about that supply chain? With continued hiccups, businesses that are otherwise rebounding quite well are finding themselves in surprising binds. If you’re among them, you’ve likely had to pivot more than usual to get your products and services to your customers. Some of those pivots have hidden costs, and others come with unexpected tax breaks.
A recent JPMorgan Chase & Co. survey finds that nine out of 10 midsize U.S. businesses expect their businesses to grow and thrive over the next year. A significant obstacle to overcome, however, is a clogged supply chain. How are others dealing with this challenge? The survey found 65% are strategically stockpiling, 51% are adding suppliers from new geographies, and 48% are allocating more funds to move goods.
If you’ve made these and other moves yourself, take a look at the following ways your taxes could be affected:
YOU’RE MOVING INVENTORY MORE OR STORING IT IN TRANSIT
Supply chain bottlenecks have hit manufacturers especially hard since one finished product could include components from dozens of different locations. Delays with some components and not others have led to sales and use tax complications. For example, you may have had to store inventory in transit for the first time. Depending on the state holding your goods, you could suddenly owe income tax in that state. And if you purchased components tax-free in one state and move them to a different state, you could owe use tax.
YOU’RE BUYING FROM NEW SUPPLIERS
Deloitte reports an uptick in companies seeking diversification of suppliers and geographies while sourcing raw materials, intermediate products, and finished goods. If you’re among them, it’s essential to understand the direct tax and transfer pricing profile implications as well as global trade and other transaction taxes.
YOU’VE INNOVATED IN SOME WAY
Supply chain difficulties have led to creative thinking and innovation by small and midsize companies. And for that, you can be rewarded. How? With the research and development (R&D) tax credit. Maybe you were forced to build your widgets differently or needed to invest in technology that allowed you to streamline operations or logistics. Don’t discount these expenses as mere cost-of-business without consulting your CPA first.
YOU STARTED SELLING DIFFERENTLY
Did you set up an online store to sell directly to customers? Maybe you set up an affiliate or commission-based program? If you’re suddenly selling in a way you haven’t before, you may be hit with surprising sales tax nexus complications. In Texas, you must collect the sales tax of the state/locale of the person buying from you (although the threshold for the law to kick in is set high at $500,000). Other trends like “buy now, pay later” have become easier to offer thanks to tech, but the sales tax rules for such arrangements vary by state.
YOU’RE SPENDING TOO MUCH
Supply chain issues can cause high costs and missed sales. They can throw estimates off track and lead to overstaffing. It’s important to calculate these costs and determine whether you can claim business losses on your tax return for the year. There are some limits in place, and the rules differ depending on whether your business is passthrough or corporate. But the good news is that even if you reach an excess loss—when total business deductions are more than your total gross income—you can now carry over all or part of the excess loss to a future tax year (the tax loss carry-back is not available this year).
Supply chain headaches have caused enough financial surprises. Don’t let taxes be a surprise, too. If you’ve made any of these changes above, let your CPA know so that they can help you stay on top of any business structure, registration, reporting and payment changes you may also need to make. Feel free to contact us with questions.