Over the last several years, the aerospace industry has remained robust—and Spokane is no exception. Commercial airline orders are experiencing a multiyear backlog, production rates are increasing, and the combination of low interest rates and a high demand for fuel-efficient aircraft and composite materials give the vulnerable aerospace industry a number of opportunities for growth. 

Home to more than 100 manufacturers, distributors, suppliers, and organizations involved in the aerospace indus-try, Spokane and the Inland Northwest continue to thrive, winning dozens of new aerospace contracts each year. Even so, many companies that operate in this region qualify for tax credits and incentives they aren’t claiming, leaving large sums of money on the table.

Even beyond the credits and incentives available at the federal and state levels, there’s seldom been a better tax environment for aerospace manufacturers, which make up Spokane’s leading industry segment. Companies that claim available credits and incentives can improve directly their financial situation and their ability to compete outside the Inland Northwest, and the tax savings are an opportunity to establish profitable operations and reinvest savings into ongoing projects. Here are a few tax-saving opportunities aerospace companies should consider.

Washington excise tax

With the aim of fostering continued growth in Washington’s aerospace industry, the state Legislature created several tax incentives. 

A business-and-occupation tax reduction applies to both the manufacturing activity and the subsequent sale of certain aerospace-related manufactured products. It also applies to sales made by Federal Aviation Administration Part 145 repair stations. Standard B&O rates are set at 0.484 percent—but the reduced rates for manufacturers and Part 145 repair stations are just 0.2904 percent through June 30, 2024. A similar rate reduction applies to nonmanufacturers engaged in the research, design, and engineering of aerospace products: The B&O tax rate for these activities is 0.90 percent rather than the standard 1.5 percent.

The state also has a B&O tax credit for qualified aerospace product development expenditures and another for property tax or leasehold excise taxes paid on property. If your company develops new aerospace products, you may be able to offset your tax liability by 1.5 percent of your qualifying expenses. The property tax credit applies to excise taxes paid on new buildings and related land as well as to the increased value of renovated buildings and certain tangible personal property.

Also, computer hardware, software, and peripherals used primarily in aerospace design, development, and engineering are exempt from retail sales-and-use tax.

R&D tax credits

In addition to locally offered benefits, companies in Spokane can take advantage of research and development (R&D) tax credits. Any company that devotes time and resources to creating new or innovative products, improving existing products, or developing processes, prototypes, or software—and hires designers or engineers—is likely to qualify. Considering Spokane’s focus on manufacturing aircraft parts and auxiliary equipment, companies in the region are likely performing R&D activities on a regular basis.

While the federal R&D tax credit expired at the end of 2013, it’s been retroactively extended consistently since its inception in 1981. Furthermore, R&D tax credits may be claimed for prior tax years, so it’s worth considering whether your company could benefit from looking into these additional tax savings.

To be eligible, your company should clearly document all of its R&D activities. Eligible activities include developing new components, creating production processes to satisfy customer needs, and designing specialized tools or prototype tooling machines. They also include developing new composite materials and manufacturing methods, developing new surface-hardening methods, and innovating to optimize strength and minimize weight.

For every dollar deemed a qualified expense, which includes wages, supplies, and contract research, 5 percent to 10 percent can be recaptured as a net credit that adds to your company’s bottom line. For example, an aerospace component subcontractor in Spokane making $30 million a year in revenue could see a federal tax savings of $224,000 annually, depending on its ongoing research activity. That’s the equivalent of a project that adds $224,000 to the bottom line.

IC-DISCs  

Players in the aerospace industry also should consider whether they might benefit from forming an interest charge domestic international sales corporation (IC-DISC): a well-established, congressionally legislated structure that provides benefits to U.S. taxpayers engaged in the sale, exchange, or lease of certain export property or services.

For aerospace companies that manufacture goods anywhere in the United States and then export the goods to be consumed outside the country, the IC-DISC strategy may be an opportunity to save taxes permanently. The exporter, which could be an S corporation, limited-liability corporation, partnership, or closely held C-corporation, pays commissions to the newly formed sales company (the IC-DISC), which is owned by the exporter or the exporter’s shareholders or partners. The commissions are deductible by the exporter for U.S. federal income tax purposes, and the IC-DISC isn’t subject to federal income tax.

Because an IC-DISC is considered a “qualified domestic corporation,” the dividend payment of the commission income it receives is taxable to the exporter’s individual shareholders or partners at a favorable 23.8 percent rate. This means an exporter with a shareholder in the highest individual tax bracket—39.6 percent—will be taxed at a 23.8 percent rate on the distribution of the export earnings shifted to the IC-DISC. Naturally, the commission deduction will yield the greatest tax benefit when a taxpayer is in the 39.6 percent tax bracket.

Given the potential tax savings of these credits and incentives, Spokane companies involved in the aerospace industry have a profound opportunity to decrease their overall tax liabilities at both the federal and state levels. Contact a tax professional to learn whether your company may be eligible to claim the incentives and credits mentioned above and to guide you through the process.