Cooper Norman sees more manufacturers asking about Section 45X every quarter, and most are surprised to learn that the credit is a direct cash lever rather than a deduction against income. Section 45X, added by the Inflation Reduction Act and refined by IRS guidance, pays U.S. producers a per-unit credit for eligible components sold to unrelated parties.

The credit is denominated in dollars per unit and stacks with other production incentives. For a Utah battery-component or solar-adjacent manufacturer, or an Idaho processor of qualifying critical minerals, that per-unit math can dwarf a comparable R&D credit. Here is what qualifies, how the credit is claimed, and how the phaseout schedule affects the timeline.

What Section 45X rewards

Section 45X pays a credit for eligible components produced by the taxpayer in the United States and sold to an unrelated person. The four families of eligible components are:

• Solar energy components (photovoltaic cells, wafers, modules, polymeric backsheets, torque tubes, structural fasteners)
• Wind energy components (blades, nacelles, towers, offshore wind foundations)
• Inverters, including central, utility, commercial, residential, and microinverters
• Electrode active materials, battery cells, and battery modules
• Applicable critical minerals

Each component has its own per-unit credit amount defined in the statute or by Treasury regulation. Battery cells, for example, are credited by kilowatt-hour of capacity, while solar modules are credited by watt of direct-current capacity.

Who claims the credit

The credit belongs to the producer. Two rules matter for that determination:

• The producer must manufacture the component in the United States or a U.S. territory.
• The component must be sold to a person unrelated to the producer. Related-party sales generally do not generate a credit unless a related-party election is made.

Contract manufacturing arrangements have their own rules under the Treasury regulations. Which party is treated as producing the component depends on who bears the economic risk and who directs the manufacturing activities, not just whose name is on the shipping paperwork.

Direct pay and credit transferability

Section 45X credits can be monetized in two ways beyond the traditional offset against tax liability:

• Direct pay. Tax-exempt entities, states, and certain other applicable entities can elect to receive the credit as a refundable payment.
• Transferability. Taxable manufacturers can sell all or part of a credit to an unrelated party for cash. The buyer applies the credit against its own tax liability.

Transferability changed the economics of the credit meaningfully. A profitable manufacturer with no immediate use for the credit can convert it to cash by finding a transferee, typically at a small discount to face value. Cooper Norman helps clients evaluate whether transfer or carryforward is the right move given projected tax liability.

Phaseout schedule and what it means for planning

Full-value credits are available through 2029 for most eligible components. The phaseout schedule then reduces the credit as follows:

• 75% of full credit for components sold in calendar year 2030
• 50% of full credit for components sold in calendar year 2031
• 25% of full credit for components sold in calendar year 2032
• Credit expires for components sold after December 31, 2032

Two exceptions matter. Wind components are no longer eligible for §45X credits generated after 2027. Critical minerals, originally exempt from the phaseout, are now subject to a staged phaseout from 2031 through 2034 under legislation enacted after the original IRA.

The practical read is that any capacity coming online in 2026 or 2027 captures the full credit for its earliest, highest-volume production years. Delays into 2030 leave real dollars on the table.

Documentation standards to prepare now

The IRS will require, at minimum, records that establish:

• The component produced, quantity, and technical specification
• The place of production, tied to the U.S.-manufactured requirement
• The identity of the purchaser and their unrelated-party status
• Bills of materials and process documentation supporting the component’s classification

Manufacturers pursuing transferability face additional documentation, including a required registration process with the IRS before a transfer election can be made.

For Idaho and Utah manufacturers building capacity in battery components, solar-adjacent parts, or applicable critical minerals, the credit is worth an intentional pass through the numbers before capital planning is finalized.

This overview is general information, not tax advice for your specific business. Talk with a Cooper Norman advisor about how Section 45X fits with your production timeline and tax planning.

For four years, manufacturers watched a punitive change to Section 174 grind through their cash flow. Instead of deducting research and experimental costs in the year they were incurred, plants had to capitalize and amortize those costs over five years for domestic work and fifteen for foreign work. For an Idaho food processor running new-formulation trials or a Utah medical-device manufacturer iterating on tooling, the effect was a tax bill on income that had already been spent.

That regime has now been reversed for domestic work. The One Big Beautiful Bill Act (OBBBA), signed in July 2025, added new Section 174A and restored immediate expensing for domestic research and experimental expenditures for tax years beginning after December 31, 2024. The relief is permanent, with no scheduled sunset.

Here is what that means at the plant level, and what to do before year-end filing.

What the OBBBA change actually does

New Section 174A lets manufacturers deduct qualifying domestic research and experimental costs in the year incurred, the same way most operating expenses are treated. There is no more five-year wait for domestic R&D deductions.

Taxpayers who want to smooth income across years can still elect to capitalize domestic costs and amortize them over a period of not less than sixty months, starting in the month the research benefit is first realized. That election is a planning tool, not a punishment.

Foreign R&D was left in the old regime. Costs tied to research performed outside the United States still amortize over fifteen years under Section 174. For most Cooper Norman clients, that split is manageable, but any manufacturer with an offshore engineering group or contract-development spend abroad should segregate those costs cleanly.

Activities that count as Section 174 work

Section 174 covers the broader universe of research and experimental expenditures, which is wider than the qualified research the Section 41 credit rewards. Expenses that typically fall under 174 include:

• Wages and benefits for employees performing or directly supporting research
• Supplies consumed in the research process
• Contract research paid to outside firms
• Software development, including internal-use software
• Overhead reasonably allocated to research activity

Software development remains inside Section 174 by statute, which matters for manufacturers running their own MES, quality, or IoT platforms.

The 2022 through 2024 problem, and what to do about it

The retroactive relief window for small businesses closed on July 6, 2026. Businesses with average annual gross receipts of $31 million or less were allowed to amend 2022, 2023, and 2024 returns to apply immediate domestic expensing. If you were eligible and did not amend, that window is now shut.

Larger manufacturers, and any business that did not amend during the window, will still be carrying unamortized Section 174 balances from prior years. Those balances continue to amortize on the original schedule until fully deducted. Cooper Norman advisors can model out the remaining amortization runway and flag any accounting-method-change filings still available.

Planning moves worth running before year-end

Several decisions can move real dollars for a plant this year:

• Segregate domestic and foreign R&D at the source. Chart-of-accounts changes made in Q4 are far cleaner than trying to split time cards in March.
• Coordinate Section 174A with the Section 41 R&D credit. They are different provisions, and the credit is still available for qualified research on top of immediate expensing.
• Look at software development spend deliberately. Custom software, PLC programming, and MES work often qualify under both 174 and 41 when documented as they occur.
• Model cash flow with the change baked in. Many manufacturers built quarterly estimates around amortized 174. Reforecast now so estimated payments do not overshoot.

What still requires attention

Section 174A is not a blank check. Contemporaneous documentation still matters, and the line between operating expense and Section 174 expenditure is not always obvious. Prototype builds, tooling development, and formulation trials read differently to a plant manager than they do to a revenue agent, and the difference shows up on audit.

For Idaho and Utah manufacturers with growing R&D spend, particularly in food processing, aerospace components, and medical devices, running a mid-year check with your CPA on how Section 174A is being applied is time well spent.

This overview is general information, not tax advice for your specific business. Talk with a Cooper Norman advisor about how these rules apply to your operation, and how they interact with the tax planning you already have in place.

An Idaho fabricator sells the business after 20 years and walks away with $12 million of gain on the transaction. Under the general capital gains rules, that gain triggers roughly $2.4 million in federal tax at the 20 percent long-term rate, before state tax and Net Investment Income Tax. Under Section 1202, the same seller could pay zero federal capital gains tax on much of that gain if the company was structured as a C corporation and the owner held the stock for at least five years.

Section 1202 is one of the most valuable planning tools in the code for a growing manufacturer, and it is one of the most commonly missed. Owners routinely form as LLCs or S corporations because those structures work well while the company is operating, then discover at sale time that they left a seven or eight figure exclusion on the table.

What §1202 Excludes and Why It Matters at Sale

Section 1202 excludes from federal income tax the gain on the sale of Qualified Small Business Stock (QSBS) held for more than five years. For stock acquired before September 27, 2010, the exclusion is 50 percent. For stock acquired between September 28, 2010 and July 4, 2025, the exclusion is 100 percent. The One Big Beautiful Bill Act created a tiered exclusion for stock acquired after July 4, 2025: 50 percent at three years of holding, 75 percent at four years, and 100 percent at five years.

The cap is the greater of $15 million per issuer (raised from $10 million by OBBBA, for stock acquired after July 4, 2025) or 10 times the taxpayer’s aggregate adjusted basis in the QSBS. The cap applies per shareholder, per issuer.

The Qualified Small Business Test

To issue QSBS, a company must be a domestic C corporation and must have aggregate gross assets of no more than $75 million at all times before and immediately after the stock is issued (raised from $50 million by OBBBA, for stock acquired after July 4, 2025). The gross assets test uses cash and the adjusted basis of other property. Post-issuance growth beyond the ceiling is allowed. Companies that exceeded the ceiling before issuance are permanently disqualified from issuing QSBS.

Which Manufacturing Activities Qualify

Section 1202 requires an active business use test: the corporation must use at least 80 percent of its assets in a qualified trade or business. Manufacturing squarely qualifies. So do most industrial and technical businesses.

Excluded activities include most services provided by health, law, engineering, architecture, accounting, actuarial, and consulting firms, plus banking, insurance, financing, farming, natural resource extraction, and hospitality. For a pure Idaho or Utah manufacturer, this is not a hard test. For a hybrid business that mixes production with a significant service or resale component, the 80 percent line becomes worth documenting.

The 5-Year Holding Period Requirement

The holding period starts on the date the stock was originally issued to the taxpayer. Stock acquired through a §351 tax-free contribution takes a tacked basis and holding period from the contributed property. Stock received in a §1045 rollover from prior QSBS gets its own tacked holding period.

Sales before five years do not get the full exclusion, but §1045 allows a rollover of gain into replacement QSBS if reinvested within 60 days. For a manufacturer approaching a sale before the five-year mark is hit, a §1045 rollover into new QSBS can preserve the exclusion track for a subsequent sale.

Original Issuance and C-Corporation Requirements

QSBS must be acquired at original issuance in exchange for cash, other property (not stock), or services. Secondary market purchases from other shareholders do not qualify. The company must be a C corporation at the time the stock is issued and generally must remain a C corporation for substantially all of the five-year holding period.

Planning Moves for LLCs and S-Corps

Most family manufacturers are formed as LLCs or S corporations for operational flexibility and single-level tax on operating income. A conversion to C corporation before a planned sale can start the QSBS clock, but it locks in double taxation on operating income during the holding period and forfeits the built-in S corporation earnings from QSBS eligibility.

The decision is a real trade-off: C corporation double tax on operating profits for five years, in exchange for the exclusion on up to $15 million (or 10x basis) of gain at sale. For a business with a defined sale window, real growth ahead, and moderate operating profit relative to eventual sale value, the math often favors the conversion.

QSBS is one of the highest-leverage tax planning tools available to a growing Idaho or Utah manufacturer, and it has to be structured in advance. The manufacturing team at Cooper Norman has run the model for family-owned producers considering C corp conversion, §1045 rollovers, and gift planning that stacks §1202 caps across family members. If you are within a five to seven year window of a possible sale, our valuation and transition planning group is the right first call.

This overview is general information, not tax advice for your specific business. Talk with a Cooper Norman advisor about how these rules apply to your operation.

A small Idaho grocer runs at a reported gross margin of 28 percent. The physical inventory count at year-end reveals a 2.1 percent shrink rate against sales. That $180,000 in missing inventory (against $8.5 million in annual revenue) turns a healthy margin into a mediocre one and quietly consumes half the store’s operating profit.

Shrinkage happens in every retail operation. Some of it is unavoidable. Most of it is measurable, reducible, and eventually preventable to a large degree. What separates well-run retailers from struggling ones is not whether they have shrink; it is whether they can see it, respond to it, and record it correctly.

How Shrinkage Actually Hits the P&L

Shrinkage is the difference between the inventory the books say should be on hand and the inventory the count actually finds. It has multiple root causes: external theft (shoplifting), internal theft (employee theft), vendor fraud, receiving errors, damage, spoilage, ticket switching, and administrative error. Each root cause has a different fix.

The P&L impact runs through cost of goods sold. When the year-end physical count comes in short, the inventory adjustment increases COGS by the shortfall amount, reducing gross margin dollar for dollar. A 1 percent shrink rate on $10 million in revenue is $100,000 pulled directly out of gross profit.

The Shrink-to-Sales KPI and Its Peer Benchmarks

The industry standard shrink metric is inventory shrink as a percentage of retail sales. Peer benchmarks vary by category. Supermarkets and grocery typically run 1.5 to 2.5 percent; general merchandise and mass retail run 1 to 1.5 percent; specialty retail and apparel can run higher, especially in high-theft categories.

A retailer running above the peer benchmark for their category is losing meaningfully more than competitors. A retailer running below is either exceptional at loss prevention, is missing shrink through poor cycle counting, or has categories that structurally do not shrink.

Cycle Counts vs. Full Physical Inventory

The traditional model runs one full physical inventory per year, at fiscal year-end. That approach produces one data point per year and delivers no visibility between counts. Shrinkage that occurred in month three is not discovered until month twelve.

Cycle counting distributes the counting workload across the year. Every SKU gets counted several times annually, higher-risk categories counted more frequently. The result is continuous visibility into shrink by SKU and department, plus fewer surprises at year-end.

The transition from full physical inventory to cycle counting typically requires a good inventory management system and disciplined counting procedures. The return is significant: cycle counting retailers usually see 20 to 30 percent lower shrink rates over time simply because problems get detected and addressed sooner.

Journal Entry Treatment of Shrinkage

Two journal entries capture shrinkage properly. The first, during the year, records estimated shrink each period based on trend or expected rate. This reserve smooths the P&L impact rather than dropping it all at year-end.

Debit COGS (Shrinkage) [estimated period shrink]
Credit Inventory Reserve for Shrinkage [reserve account]

The second, at physical inventory, reconciles the reserve to actual shrink discovered.

Debit COGS or Credit COGS (as needed to reconcile)
Debit or Credit Inventory Reserve
Credit or Debit Inventory (to write down to actual counted value)

Some retailers skip the reserve and take shrink entirely at physical count. That approach is simpler but produces a large gross margin hit at year-end that distorts the P&L.

The Loss Prevention Investments That Actually Pay Back

Four investment categories generally produce positive ROI for retailers running above peer benchmarks:

• Video surveillance with analytics. Modern systems detect specific behaviors (sweethearting at the register, cart pushouts) rather than requiring constant human monitoring.
• Exception reporting on POS transactions. Analytics that flag unusual return patterns, discount abuse, or void frequency at the register-operator level.
• Receiving accuracy tools. Barcode scanning and vendor scorecarding catch vendor fraud and receiving errors before they become inventory adjustments.
• Employee background checks and integrity testing. Internal theft accounts for roughly a third of retail shrink in most categories. Hiring quality drives it down.

Big-ticket investments (article surveillance tags, uniformed security, exit gates) can help in high-theft environments but generally have less favorable ROI than the process and analytics investments.

External vs. Internal Theft: Different Playbooks

External theft (shoplifting) responds to visibility, layout design, and product placement. Products displayed near cash wraps or in view of staff are less exposed. Certain high-theft categories (razors, small electronics, cosmetics) sometimes justify locked cases or receipt-check exits.

Internal theft (employee theft, sweethearting, register manipulation) is best addressed through hiring practices, segregation of duties, and exception reporting rather than surveillance alone. Employees who know their transactions get reviewed behave differently.

Shrinkage is one of the most persistent silent costs in retail, and it responds to management attention more than most retailers realize. The retail advisory team at Cooper Norman works with Idaho and Utah retailers to benchmark shrink rates, evaluate loss prevention investments, and set up cycle counting that catches problems earlier. Our audit and assurance group reviews inventory controls as part of every retail audit.

The federal Research and Development tax credit is often described as a Silicon Valley perk. That framing costs Idaho and Utah manufacturers real money every year. Shop-floor process improvements, new-formulation trials, tooling redesign, and custom software development all routinely qualify.

The credit is a dollar-for-dollar reduction in tax liability under Section 41, and qualified small businesses can apply up to $500,000 per year against payroll taxes rather than income tax. For a Utah aerospace-tier supplier or an Idaho cheese processor iterating on shelf-life, that can be the difference between a break-even quarter and a fundable one.

Here is what manufacturers should know before assuming the credit does not apply.

What the credit is worth

The Section 41 credit rewards qualified research expenses at either a regular rate or an alternative simplified credit (ASC) rate. Most manufacturers use the ASC because it does not require historical base-period data going back to the 1980s.

The credit reduces the manufacturer’s federal income tax bill. For companies with gross receipts under $5 million in the current year and no gross receipts before the prior five-year window, up to $500,000 can be applied against payroll tax under Section 41(h). That amount first offsets the 6.2% employer Social Security portion (up to $250,000), then the 1.45% Medicare portion for any remainder.

Many states, including Idaho and Utah, have their own R&D credits that stack on top of the federal credit. Coordinating both is a Cooper Norman conversation.

The four-part test in plain language

Qualifying research must meet all four of these tests. If any test fails, the activity does not qualify:

• Permitted purpose. The activity aims to develop or improve a product, process, technique, formula, invention, or software.
• Technological in nature. The work fundamentally relies on principles of physical or biological sciences, engineering, or computer science.
• Elimination of uncertainty. At the start of the project, the outcome, method, or capability was uncertain.
• Process of experimentation. The team systematically evaluates alternatives, whether through modeling, trial and error, or structured testing.

The bar is technical uncertainty, not scientific novelty. A cheese plant reformulating for lower sodium, an aerospace supplier iterating on a machined tolerance, and a med-device manufacturer testing packaging integrity all sit inside these tests.

Shop-floor activities that almost always qualify

Cooper Norman sees the following activities qualify repeatedly for manufacturing clients:

• New product design and prototyping
• Process improvements that increase throughput, reduce scrap, or improve yield
• Custom tooling and fixture development
• Formulation trials, whether food, chemical, or coatings
• Software development for MES, quality, or automation systems
• Testing and validation to meet a new customer or regulatory specification
• Environmental or sustainability engineering that changes the process

Activities that do not qualify

Some work looks like R&D but fails the tests. Common disqualifiers:

• Research conducted outside the United States, which is excluded from Section 41
• Market research, consumer surveys, and management studies
• Adaptation of an existing product to a specific customer’s requirements when the underlying technology is unchanged
• Duplication of an existing product or process from public information
• Research funded by another party where the manufacturer bears no financial risk

Funded-research disqualification is where good projects lose credits. Contract language decides who is bearing the risk, so the contract review has to happen before the work is done.

How to document the credit as you go

The IRS wants a nexus between the qualified activity, the person performing it, and the dollars claimed. Contemporaneous documentation is far cheaper than reconstruction. What actually holds up on audit:

• Project descriptions written at the time the project starts, not after year-end
• Time tracking or reasonable time allocations tied to named projects, not general R&D buckets
• Engineering notebooks, test data, iteration logs, and version control history for software
• Supply and contract-research invoices with a clear project reference

Filing Form 6765

The credit is claimed on Form 6765. Starting with 2026 filings, most claimants complete the expanded Section G, which requires more detail about qualified activities. Qualified small businesses electing the payroll offset are exempt from the new Section G reporting requirement, which keeps the paperwork burden lower for start-ups still on the payroll election.

The payroll offset itself is claimed on the next quarterly Form 941 after the income tax return is filed, so the timing matters if cash flow is tight.

This overview is general information, not tax advice for your specific business. Talk with a Cooper Norman advisor about how to document, claim, and coordinate the credit with your tax planning.

Every retailer that accepts credit cards is subject to PCI-DSS. That includes the Boise coffee shop with a Square terminal, the Salt Lake boutique running a full POS system, and the Utah e-commerce brand doing seven figures through Shopify. The rules apply regardless of size. What varies is the specific compliance path.

Small retailers frequently misunderstand PCI compliance in two directions. Some assume it does not apply to them because they are small; it does. Others assume they need enterprise-grade security programs; usually they do not. The right path for most small retailers is well-defined and manageable if the merchant knows what to actually do.

The Four Merchant Levels and Where You Sit

PCI-DSS defines four merchant levels based on annual card transaction volume:

• Level 1: More than 6 million card transactions annually. Requires annual on-site QSA (Qualified Security Assessor) audit and quarterly external network scans.
• Level 2: 1 million to 6 million transactions annually. Requires annual self-assessment questionnaire and quarterly external scans.
• Level 3: 20,000 to 1 million e-commerce transactions annually. Similar requirements to Level 2.
• Level 4: Fewer than 20,000 e-commerce transactions or up to 1 million total transactions. Requirements set by the acquiring bank, but typically self-assessment.

Most small retailers are Level 4. That means the compliance path is a self-assessment questionnaire (SAQ), a completed attestation of compliance filed with the acquirer, and (for retailers with any internet-facing systems handling card data) quarterly external network scans by an Approved Scanning Vendor.

Choosing the Right Self-Assessment Questionnaire

PCI-DSS offers multiple SAQ variants, each corresponding to a different card acceptance environment. Choosing the right one dramatically reduces the compliance workload.

• SAQ A: For e-commerce retailers who outsource card processing entirely (typically via redirect or iframe to a service provider). Roughly 20 questions.
• SAQ A-EP: For e-commerce retailers whose website interacts with card data even if not stored. Roughly 190 questions.
• SAQ B: For retailers using standalone dial-out or IP-connected payment terminals with no card data storage. Around 40 questions.
• SAQ B-IP: For retailers using standalone IP-connected terminals. Roughly 80 questions.
• SAQ C: For retailers with a payment application connected to the internet. Around 160 questions.
• SAQ C-VT: For retailers using a virtual payment terminal on a dedicated device. Roughly 80 questions.
• SAQ D: The full SAQ for retailers who store, process, or transmit cardholder data in ways not covered by other SAQs. Around 300 questions.

Getting the SAQ classification right can be the difference between 20 questions and 300. Retailers who default to SAQ D out of caution create massive unnecessary work.

Tokenization: The Fastest Way to Reduce Scope

The single highest-leverage move for reducing PCI scope is tokenization. Modern payment processors (Stripe, Square, Adyen, and others) replace card numbers with tokens at the point of capture. The retailer never handles, stores, or transmits the actual card number.

Tokenized environments generally qualify for the simpler SAQs (SAQ A for e-commerce, SAQ B or B-IP for card-present). The compliance burden drops dramatically, and the breach exposure drops even more.

A retailer running on a modern integrated payment platform is usually already tokenized, but should confirm the specific implementation with the processor. Not all processors tokenize the same way.

PCI Costs You Cannot Avoid

Even the simplest compliance path carries some cost:

• Quarterly external scans by an Approved Scanning Vendor: $500 to $2,000 annually for a small retailer
• Annual attestation of compliance filed with the acquirer
• Payment processor compliance fees (typically $10 to $30 per month, sometimes bundled into processing rates)
• Non-compliance fees ($20 to $100 per month) that some acquirers charge until valid attestation is on file

The non-compliance fee is a real motivator. Merchants who do not complete their SAQ and attestation often end up paying more in non-compliance fees than the compliance itself would cost.

The Fine Print in Card-Present POS Contracts

Card-present POS agreements often include a PCI compliance program (typically an annual $20 to $60 fee that includes access to compliance tools and reduces the retailer’s paperwork). Reading the fine print matters: some programs cover only the SAQ; others include scan services; some are optional and can be declined if the retailer completes attestation independently.

The programs are usually worth the fee for a small retailer without dedicated IT staff. For a retailer with an IT vendor or in-house tech capacity, they can be duplicative.

What a Breach Actually Costs a Small Retailer

Small-retailer breaches carry direct costs including forensic investigation, notification to affected consumers, credit monitoring for affected consumers, potential card brand fines ($5,000 to $50,000 per incident is common at the small-merchant level), and indirect costs from reputation damage. Total exposure for a small-retailer breach commonly runs from tens of thousands to low hundreds of thousands of dollars.

Cyber insurance with retail-specific coverage (including breach response and card brand fine coverage) is a meaningful risk transfer at reasonable premium levels for small retailers.

PCI-DSS is one of those compliance areas that seems intimidating from the outside and turns out to be manageable once the retailer knows which SAQ applies. The retail advisory team at Cooper Norman helps Idaho and Utah retailers evaluate their PCI environment, choose the right compliance path, and cut scope through tokenization and processor selection. Our audit and assurance group reviews payment card controls as part of retail engagements.

For decades, the tax code treated a factory building the same as any other commercial real estate: 39 years of straight-line depreciation, with occasional cost segregation to peel off five and seven year components. That framework changed with the One Big Beautiful Bill Act (OBBBA). New Section 168(n) creates a category called Qualified Production Property (QPP) and allows 100 percent bonus depreciation on the structure itself.

For any Idaho or Utah manufacturer building a plant right now, expanding an existing facility, or converting a warehouse to production use, that is one of the most consequential tax changes in a generation. Notice 2026-16 provides the first meaningful guidance on how the rules work, what qualifies, and which projects will realize the benefit.

What Qualified Production Property (QPP) Means

QPP is nonresidential real property used as an integral part of a qualified production activity. The activity has to be the manufacturing, production, or refining of a qualified product, and the product has to be tangible personal property that results in a substantial transformation. Assembly of finished imported components generally does not qualify. Actual production, machining, chemical processing, food processing, and similar transformation activities generally do.

The property has to be located in the United States, placed in service in a qualified production activity, and originally used by the taxpayer or an unrelated party.

Placed-in-Service Windows

Two dates matter. Construction must begin after January 19, 2025 and before January 1, 2029. The property must be placed in service before January 1, 2031. Buildings that were substantially complete before the OBBBA effective date are generally out. Buildings mid-construction on that date may qualify for the portion of basis attributable to work performed after the effective date, subject to the transition rules in Notice 2026-16.

The “begin construction” test tracks the physical work test used elsewhere in the code. Site prep, foundation pours, and structural framing count. Design work, permitting, and financing do not.

What Counts as a Qualified Production Activity

The statute and the Notice draw the line at substantial transformation. Idaho examples that clearly qualify include potato processing plants, dairy processing facilities, cheese production, meat processing, and industrial fabrication. Utah examples include aerospace component machining, medical device manufacturing, and food and beverage production.

Warehousing, distribution, packaging-only operations, and pure assembly of imported parts generally do not qualify. Mixed-use buildings require an allocation between qualified and non-qualified square footage; the Notice includes safe harbors for buildings that are at least 90 percent qualified use.

Structures vs. Land vs. Personal Property

QPP applies to the building shell and non-personal-property components. It does not apply to land, land improvements, or personal property already depreciable under existing bonus rules. In practice, this expands what a cost segregation study can capture. The 39-year building shell that was previously stuck at slow depreciation now qualifies for 100 percent write-off if the QPP tests are met, while cost-segregated personal property continues on its existing five, seven, or fifteen year lives.

Election Mechanics and Deadlines

The taxpayer elects QPP treatment on the return for the year the property is placed in service, using the mechanics in Notice 2026-16 for the initial election window. The election is generally irrevocable without IRS consent. Any manufacturer near the placed-in-service line should coordinate with their tax advisor before year-end to lock in the treatment on the correct return.

Interaction with Cost Segregation Studies

Cost segregation remains valuable even under QPP. A good study accomplishes three things: it isolates land improvements (which sit outside QPP), it identifies personal property with shorter depreciable lives (which may accelerate over even a 100 percent write-off), and it produces documentation that supports the QPP allocation for mixed-use buildings.

For an Idaho food processor building a new plant in Bingham County or a Utah medical device manufacturer expanding in Provo, the layered play is straightforward: QPP treatment on the qualifying structure, cost segregation on the surrounding personal property and land improvements, plus continued bonus depreciation on equipment.

Notice 2026-16 is dense, and QPP eligibility turns on facts that need to be documented before the shovel goes in the ground, not after the building is complete. The manufacturing team at Cooper Norman has been running QPP analyses for clients across the Snake River corridor and the Wasatch Front since the Notice dropped. If you are planning or already building a facility that could qualify, our tax planning group can model the write-off against your projected income and help you sequence the paperwork.

This overview is general information, not tax advice for your specific business. Talk with a Cooper Norman advisor about how these rules apply to your operation.

Ask two controllers at two Idaho food processors which inventory method they use, and you may get two confident answers pointing in opposite directions. The choice between LIFO and FIFO is not a preference. It is a policy decision that affects taxable income, bank covenants, and comparability with peers.

Neither method is universally better. The right answer depends on how commodity input costs are moving, how quickly SKUs turn, and how the balance sheet is viewed by lenders. Here is the decision framework Cooper Norman uses with manufacturing clients.

The decision framework, not a textbook definition

LIFO (last-in, first-out) treats the newest inventory as the first sold. In a rising-cost environment, cost of goods sold reflects the most recent, highest costs, which reduces taxable income. FIFO (first-in, first-out) treats the oldest inventory as the first sold. In a rising-cost environment, cost of goods sold reflects older, lower costs, which increases taxable income.

The actual physical flow of inventory does not have to match the accounting method. A potato processor can physically rotate stock oldest-first and still elect LIFO for tax purposes.

When LIFO wins

LIFO is worth serious consideration when three conditions hold:

• Input costs are rising and expected to stay elevated. One or two quarters of inflation is not enough. LIFO’s tax benefit compounds over multi-year cycles.
• Inventory volumes are stable or growing. LIFO layers build in higher-cost years and unwind if quantities drop. Involuntary LIFO liquidations pull old, low-cost layers into cost of goods sold, spiking taxable income exactly when the manufacturer can least absorb it.
• Bank covenants and stakeholder reporting can accommodate a lower book income. The LIFO conformity rule requires that if LIFO is used for tax, it must be used for financial statements as well.

Idaho commodity-input processors (potato, dairy, grain) hit these conditions repeatedly during inflation cycles. Utah aerospace suppliers with stable long-run contracts are also common candidates.

When FIFO wins

FIFO is generally better when:

• Input costs are falling or highly volatile with no clear direction.
• Inventory volumes fluctuate significantly, which increases the risk of LIFO liquidations.
• The manufacturer’s balance sheet needs to show current-value inventory to lenders or investors.
• Product turnover is fast and price changes are absorbed within short cycles.

FIFO also carries a lower administrative burden. LIFO requires either specific-goods tracking or a pooling method such as dollar-value LIFO, and IPIC LIFO (using published inflation indices) is common in food manufacturing but adds an annual calculation exercise.

The LIFO reserve and what it signals

Manufacturers on LIFO must disclose a LIFO reserve, which is the difference between inventory carried at LIFO and what it would be under FIFO. The reserve grows when input costs rise and shrinks when they fall.

Two things to watch:

• A rapidly growing LIFO reserve signals that the tax deferral is accumulating. That is generally healthy, though lenders may adjust ratios back to FIFO for covenant testing.
• A shrinking or negative LIFO reserve indicates deflation or inventory liquidation. Both can trigger tax pain.

The reserve is not just a technical footnote. It is a running measure of the deferred tax liability sitting inside your inventory election.

Making or revoking the LIFO election

The election is made by filing Form 970 with the tax return for the first year LIFO is used. Once made, LIFO applies going forward until IRS consent is granted to change methods.

Revoking LIFO requires filing Form 3115, an accounting method change, and the accumulated LIFO reserve becomes taxable income over a four-year spread under Section 481(a). Manufacturers considering revocation should model that recapture carefully. What was a tax deferral becomes a tax bill.

Financial statement and bank covenant impact

Because LIFO conformity requires the same method for tax and books, LIFO reduces reported income and equity in inflation cycles. That can move covenant ratios, particularly debt-to-equity and interest coverage. Before electing LIFO, the manufacturer should:

• Model current and projected covenants under both methods.
• Talk with the lender about how they view a LIFO election. Most banks are familiar with the mechanics and adjust internally, but the conversation is better had proactively than defensively.
• Confirm the timing of any planned refinancing or capital raise, since LIFO can affect the presentation of near-term financials.

For Idaho and Utah manufacturers navigating a multi-year run of elevated input costs, the LIFO conversation is worth having annually. The election is not permanent, but it is not costless to reverse.

This overview is general information, not tax advice for your specific business. Talk with a Cooper Norman advisor about whether LIFO fits your operation and how it interacts with your audit and assurance requirements.

A plant runs on lean principles: pull-based production, small batches, continuous flow, waste elimination. The accounting system runs on standard costing: predetermined rates, monthly variances, absorption-based inventory valuation. The two frameworks push in opposite directions, and after a while, the accounting reports stop influencing plant decisions altogether.

Lean accounting is what happens when a manufacturer decides to align the financial reporting system with the operational philosophy the plant already runs on. For Idaho and Utah manufacturers that have embraced lean methods on the shop floor but kept traditional cost accounting in the back office, this is worth reading.

Why Lean and Standard Costing Fight

Standard costing rewards behaviors that lean principles explicitly reject. Absorption of overhead into inventory rewards overproduction, because unsold units carry fixed costs into inventory and inflate reported income. Variance reporting incentivizes big batch runs because setup and changeover variances get spread over more units. Purchase price variance drives buyers toward volume discounts and larger inbound shipments, which create the exact inventory the lean plant is trying to eliminate.

The result: the operations team pushes for smaller batches, faster changeovers, and lower inventory, and the accounting reports quietly punish every one of those moves.

Value Stream Costing in Practice

Lean accounting replaces per-unit standard costs with value stream costing. A value stream is a group of products that share a common production process. Costs (materials, labor, machine time, tooling) are captured at the value stream level, not the individual SKU level. Profit is measured for the value stream as a whole.

The reporting looks different. Instead of a SKU-level cost card with layered allocations, the value stream P&L shows revenue, materials, labor, and other conversion costs, with contribution margin and cash flow at the value stream level. Decisions about pricing, capacity, and product mix are made against the value stream, not against fictional per-unit costs.

Box Scores and the Weekly Financial Rhythm

Lean accounting typically moves reporting from monthly to weekly, using a compact one-page report called a box score. The box score for a value stream shows:

• Operational metrics: on-time delivery, first-pass yield, cycle time
• Capacity metrics: available hours, productive hours, non-productive hours
• Financial metrics: revenue, material cost, conversion cost, value stream profit

The box score fits on a single page and gets published every week. Plant managers, value stream leaders, and finance staff all read the same report and act on the same numbers. Monthly financial close still produces GAAP-compliant statements for external users, but the operational conversation happens weekly on the box score.

Retiring Variance Reports Without Losing Control

The most common objection to lean accounting is loss of control: without variances, how does the plant know where costs are going wrong? The lean answer is that variances are a lagging indicator of problems that visual controls, in-process metrics, and daily huddles should catch in real time.

In practice, lean accounting plants keep a few key variances (usually material price and material usage) as monitoring tools, but retire the rest. The plant manager reviews box scores and value stream profitability instead of a dozen variance reports that arrive weeks after the events they measure.

What Auditors and Bankers Expect

External stakeholders (auditors, bankers, sureties, buyers) still need GAAP-compliant financial statements. Lean accounting does not replace GAAP; it operates alongside it. The month-end close produces standard financial statements using absorption costing for external reporting. Lean accounting runs as the internal management reporting layer, informing decisions but not replacing the GAAP output.

Auditors evaluate whether inventory is valued correctly under absorption costing. Lean accounting plants typically use a simplified average-cost or standard-cost method for inventory valuation, applied at the value stream level. That is fully defensible under GAAP as long as the method is documented and consistently applied.

Rolling Out Lean Accounting Without a Big Bang

The mistake is trying to convert the entire finance function in one project. Lean accounting rollouts that work usually follow a staged path:

• Identify one value stream (usually the largest or most stable) and build its box score
• Run the box score alongside existing standard costing for at least one quarter
• Retire two or three variance reports that the box score has effectively replaced
• Expand to a second and third value stream once the first is stable
• Consolidate the general ledger structure to support value stream reporting

A full rollout for a mid-size manufacturer typically runs 18 to 24 months. The payback shows up earlier, usually within the first six months, as decision quality on pricing and mix improves.

Lean accounting is not for every plant. Job shops with heavy customization, project-based manufacturers, and plants where every order looks different may find value stream costing forced. But for a manufacturer with defined product families and repeatable production, the alignment between operations and finance is worth the effort. The manufacturing team at Cooper Norman has helped Idaho and Utah plants think through the transition. Our fractional CFO group is the right first call if standard costing is fighting your lean operations.

Idaho ranks first nationally in potato production and top three in dairy. Utah has significant cheese and beverage manufacturing. Between them, the region hosts hundreds of food manufacturing facilities, each subject to federal food safety oversight from either FDA or USDA. The compliance program is not just a food safety line item on the operating budget; done well or done poorly, it drives real financial outcomes on insurance, banking, buyer contracts, and eventual sale value.

From a CPA’s seat, three things about food manufacturing compliance keep showing up in client conversations: registration and program costs are meaningful and often under-budgeted, recall exposure is chronically under-insured, and recordkeeping quality drives audit outcomes far more than the underlying operations.

Which Food Manufacturers Fall Under FDA vs. USDA

The line between FDA and USDA jurisdiction is based on product, not facility. USDA (through FSIS) inspects meat, poultry, and processed egg products. FDA regulates almost everything else, including dairy, seafood, produce, packaged goods, baked goods, and food additives.

A single facility can operate under both. A meat processor with a deli line running poultry might be USDA-inspected on the meat side and FDA-registered for other products. The regulatory burden and the recordkeeping requirements differ, which matters for compliance staffing and cost.

Facility Registration and Renewal Costs

FDA facility registration is required for every domestic and foreign facility that manufactures, processes, packs, or holds food for consumption in the United States. Registration is renewed every two years during the even-year renewal window (October through December). Registration itself is free from FDA, but the process of maintaining current registration data, updating in response to changes in ownership or product lines, and coordinating with a U.S. agent (for foreign facilities) is administrative work with real ongoing cost.

USDA-inspected facilities operate under continuous federal inspection. The inspection itself is at government cost during regular hours; overtime inspection (weekends, holidays, extended shifts) is billed to the facility. For a processor running six or seven days a week, overtime inspection can add tens of thousands of dollars annually.

FSMA Preventive Controls: The Real Cost of Compliance

The Food Safety Modernization Act (FSMA) preventive controls rules apply to most FDA-registered facilities. Compliance requires a written food safety plan, a designated Preventive Controls Qualified Individual (PCQI) with specific training, hazard analysis and control implementation, verification and validation activities, corrective action procedures, and detailed recordkeeping.

For a mid-size food manufacturer, FSMA compliance typically drives:

• Initial food safety plan development: $15,000 to $50,000 for external consultant support (depending on facility complexity)
• PCQI training: $1,500 to $2,500 per trained individual, with typically 2 to 3 trained per facility for redundancy
• Ongoing plan maintenance and reviews: 200 to 400 hours annually of qualified staff time
• Environmental monitoring, verification testing, and third-party audit costs

None of this is optional for facilities that qualify. All of it should show up in the annual budget rather than as a scramble when inspection arrives.

HACCP Plans and Where They Hit the Budget

Hazard Analysis and Critical Control Points (HACCP) plans are required for USDA-inspected facilities, juice processors, and seafood processors. Voluntary HACCP is common in other categories to satisfy buyer requirements.

HACCP plan development and validation, critical control point monitoring, verification testing, and staff training all carry real costs. The largest recurring line is usually product testing at CCPs (pathogen testing, chemical residue testing, allergen swab testing). Testing lab costs vary widely by pathogen panel and turnaround time, but a mid-size processor can easily run $30,000 to $150,000 annually in third-party lab work.

Recall Insurance and Financial Reserve Strategy

Product recall is the low-probability, high-severity risk that food manufacturers chronically under-insure. A Class I recall (reasonable probability of serious health consequences) can drive costs into the millions between product retrieval, destruction, notification, brand rebuild, and potential litigation.

Product recall insurance is a specialty coverage separate from general liability. Coverage elements typically include first-party recall expense (retrieval, destruction, notification), third-party liability (customer losses, distribution costs), business interruption, brand rehabilitation, and crisis management. Retentions for mid-size manufacturers typically run $25,000 to $250,000.

Beyond insurance, a financial reserve for recall response is prudent. Even with insurance, the deductible and the cash flow gap between event and reimbursement can strain working capital.

Recordkeeping That Protects You in an Audit

Every food safety program lives or dies on documentation. FDA inspectors, USDA inspectors, and third-party auditors all ask for the same evidence: the plan, the training records, the monitoring logs, the corrective action records, and the verification activity records.

Common recordkeeping failures that produce citations:

• Sanitation logs signed daily but not linked to specific pre-op inspections
• Environmental monitoring results without a documented remediation record for positives
• Training records without demonstrated competency verification
• Corrective action records that describe what happened but not how the root cause was addressed
• Missing calibration records for critical measurement equipment

Digital recordkeeping systems (Safefood 360, FoodLogiQ, Icicle, and similar) can reduce the compliance burden and produce audit-ready records. The tools have real cost but often produce faster inspection outcomes and lower audit finding rates.

Food safety compliance is meaningful capital and operating cost, and it deserves treatment as a real line item in the annual plan rather than an emergency response to an inspection notice. The manufacturing team at Cooper Norman works with Idaho and Utah food processors on budgeting for FSMA, HACCP, and USDA compliance programs, evaluating recall insurance, and building the financial resilience that survives an event. Our audit and assurance group reviews food safety controls as part of every audit for food manufacturing clients.