We received some questions and feedback from our last blog post about Chinese tariffs and wanted to address our readers directly with an example of how a domestic taxpayer can be adversely affected by the ongoing trade wars, and what our consultancy can do to help.
First, a clarification for those of us who are not economists: A tariff is a tax imposed on imported goods. Tariffs are paid to Customs & Border Protection at our ports when the goods arrive. Thus, when the goods are sold to domestic consumers, they are at a higher cost than they would have been had there not been tariffs imposed. The cost of a final product using the foreign sourced material goes up. Usually, the end consumer has to pay a higher price or not buy at all. The other alternatives are for domestic manufacturers to use domestically sourced materials for manufacturing or source materials from outside of China.
All of the above is complicated, and a political event that raises cost of goods and prices from one week to the next in a competitive global market can be stressful for a small to mid-sized business. For example, a manufacturer was importing integrated circuits from China for use in electronics. When the tariffs went into effect, the net increase in cost to the taxpayer’s products was 15%. Due to competitiveness in the market, an overnight 15% increase in cost (with no end in sight, and the strong likelihood of further increases by the following year), was a death knell for a large swath of the manufacturer’s product lines.
The business owner began researching and qualifying other potential importers with lower price points. At the same time, we got involved and found we could provide some immediate relief. While the long and arduous process for finding quality integrated circuits from a tariff-free source at a low price point was being undertaken by the company, we were able to conduct a study and found the following:
The manufacturer had annual payroll around $1.5MM and COGS of about $2MM. This translated to approximately $950K in Qualified Research Expenditures per year of our study. All together for a four year study period, we were able to find over $250,000 R&D tax credits for this manufacturing business.
Thus, the taxpayer is seeing reduced revenue because of a fickle market, but its tax bill is also decreased so the overall income picture is not as dire. Normally, when we get involved, we are looking to find these dollars to help businesses reinvest in their core competencies, hire employees, or grow. For some taxpayers, these tax credits can be a boon during arduous and uncertain times and we are here to help.
As always, talk to your accountant or CPA about your tax situation and feel free to contact us for a no cost assessment.