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Seven in 10 manufacturers expect at least 3 percent growth in 2017

03/01/2017  |  By: John Mark McDougal, CPA, Shareholder, Practice Leader Audit and Advisory

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Manufacturers are cutting costs and creating new products in 2017 according to the LBMC National Manufacturing and Distribution Outlook Survey report released last month. Seven in 10 U.S. manufacturers expect revenue growth of at least 3 percent this year, but labor issues — including the lack of qualified workers — are seen as a significant challenge to expansion.

The survey found that 30 percent of small manufacturers expect revenue growth in 2017 of between 3 percent and 9 percent, while 31 percent expect 10 percent to 20 percent growth, and 13 percent expect 20 percent or greater improvement. Among large manufacturers, 50 percent expect 3 percent to 9 percent growth, while 13 percent expect 10 percent to 20 percent growth, and 6 percent expect 20 percent or more.

When asked about barriers to business growth in 2017, three of the top four responses were labor based, with 47 percent of respondents citing lack of qualified workers, 38 percent citing health-care costs, and 36 percent citing pressure for increased wages.

The survey was based on responses from more than 250 executives of small and large manufacturing companies nationwide, and was conducted by LBMC and the Leading Edge Alliance, an alliance of 220 independently owned accounting and consulting firms.

The top priority for southeastern manufacturers in 2017 is cutting operations costs, the survey found; however, high-growth manufacturing respondents are more focused on research and development, with 12 percent of high-growth respondents reinvesting more than 10 percent of annual revenue.

Proactively taking advantage of tax credits, entity structuring, enhanced technology solutions, research and development, and transaction preparation will help ensure a solid foundation for growth in this segment.

A new provision of the research and development tax credit, first available in 2016, supports R&D growth by allowing the credit to be used to offset payroll taxes up to $250,000 for companies that are “small businesses.” This is particularly valuable to rapidly growing and early-stage manufacturing companies that may be pre-revenue but have significant labor expenses.

What is a small business? A partnership or corporation (including an S corporation) is a qualified small business during a tax year if its gross receipts are less than $5 million and the entity did not have gross receipts in any tax year preceding the five-tax-year period that ends with the tax year of making this election. For example, a taxpayer choosing the election in 2016 must not have had any gross receipts in a tax year preceding 2012.

In another significant finding, more manufacturers are considering both sales and mergers in 2017 as well as strategic acquisitions. While 10 percent of respondents said they explored a sale or merger in 2016, 12.5 percent said the expected to do so in 2017. And while 16.5 percent said they considered an acquisition in 2016, 23.3 percent said they expected to do so in 2017.

It's important to note that the survey was conducted in October, prior to the presidential election. In his first months in the White House, President Trump has provided comments, policies and even executive orders which may ultimately impact manufacturers in the near term, one of which is an executive order focused on streamlining the regulatory and permitting process.

With the political and regulatory climate ablaze with change, now is the time to consult your business advisors to stay abreast of the changing political and regulatory climate.