Firearms manufacturing companies operate in a complex regulatory and tax environment, which requires attention to both federal and state requirements. Effective tax strategies can drastically reduce tax liabilities and improve cash flow, allowing the business to reinvest profits for growth.

1. Choice of Business Entity

The choice of business entity has substantial tax implications. Firearms manufacturers may operate as corporations, LLCs, or partnerships, each offering different tax advantages.

• C Corporation: Under the Tax Cuts and Jobs Act (TCJA) of 2017, the corporate tax rate has been reduced to a flat 21% (IRC §11(b)). For firearms manufacturers with significant retained earnings or plans for reinvestment, a C corporation may offer lower overall tax rates compared to pass-through entities.

• S Corporation or LLC: Pass-through entities avoid double taxation, meaning profits are taxed only at the owner’s level, not at the business level. Owners report business income on their personal returns, paying tax according to individual tax brackets (IRC §1366). S Corporations allow you to split income between wages and dividends, which can reduce the payroll tax burden.

Recommendation: Work with a tax advisor to model the potential tax impact under each structure. Also, consider the ownership structure, compensation, and business goals.

2. Research and Development (R&D) Tax Credit (IRC §41)

Firearms manufacturers often innovate in product development, safety technologies, and materials engineering, all of which could qualify for the R&D Tax Credit. The IRS offers this credit to incentivize U.S.-based companies that engage in activities aimed at improving products, processes, or software.

• Qualifying Activities:

  • Prototyping new firearm models.

  • Testing and improving safety features or performance enhancements.

  • Developing new manufacturing processes or materials.

• Calculating the Credit: The R&D credit is calculated based on increases in qualified research expenses. The credit can range from 6% to 14% of qualifying R&D expenses, including wages, supplies, and contract research expenses.

Forms: To claim the R&D tax credit, firearms manufacturers must file Form 6765 (Credit for Increasing Research Activities) with their corporate tax return.

Recommendation: Conduct a thorough review of your product development pipeline to ensure you capture all qualifying expenses. Maintain detailed documentation of activities, personnel involved, and materials used in your R&D efforts.

3. Capital Expenditures: Bonus Depreciation and Section 179 (IRC §168(k), IRC §179)

Manufacturers typically invest heavily in machinery and equipment. The IRS offers two major tax incentives that allow companies to recover costs related to capital investments:

• Bonus Depreciation (IRC §168(k)): Under current law, manufacturers can take 60% bonus depreciation on qualified property placed in service until 2025, after which it will phase down.

  Bonus depreciation applies to new and used property, including equipment, tools, and certain vehicles used in manufacturing. It’s intended to spur capital purchases for business taxpayers.

  
  

• Section 179 Deduction: Section 179 allows businesses to deduct up to $1,220,000 in equipment purchases for the 2024 tax year, with a phase-out threshold starting at $3,050,000.

  Section 179 offers more flexibility for smaller businesses, as it can apply to both new and used assets and allows for more targeted deductions. Qualifying deductions include machinery, off-the-shelf software, and business vehicles (up to $12,400 for light vehicles and $30,500 for heavy vehicles).

Forms: To elect Section 179, file Form 4562 (Depreciation and Amortization) with your business tax return.

Recommendation: Evaluate whether Section 179 or bonus depreciation offers better tax benefits based on your cash flow and profit situation. Both can significantly lower taxable income in the year of asset acquisition.

4. Domestic Production Activities Deduction (IRC §199A)

Although the Domestic Production Activities Deduction (DPAD) under IRC §199 was repealed, the Qualified Business Income (QBI) Deduction under IRC §199A is a vital tax reduction tool for firearms manufacturing companies structured as pass-through entities (e.g., S Corporations, partnerships, or LLCs).

• Deduction: Owners of pass-through entities can deduct up to 20% of their QBI, which includes the net income from manufacturing operations, subject to limitations. This deduction is available through 2025 and applies regardless of whether the company manufactures firearms, ammunition, or related products.

Forms: The deduction is claimed on Form 8995 (Qualified Business Income Deduction Simplified Calculation) or Form 8995-A (Qualified Business Income Deduction).

Recommendation: To maximize this deduction, ensure that compensation and net income are optimally balanced. Work with a tax advisor to calculate QBI deductions correctly, especially if income exceeds the thresholds ($364,200 for joint filers in 2023).

5. Inventory Accounting Methods (IRC §471, §263A)

Inventory accounting methods directly impact taxable income. Firearms manufacturers must carefully select methods that reflect their operations while minimizing tax liabilities.

• Lower of Cost or Market (LCM) vs. Cost: The IRS allows manufacturers to value inventory using either LCM or cost methods. LCM may offer a tax advantage if inventory values decrease during the year, allowing you to write down costs and reduce taxable income (IRC §471).

• UNICAP Rules (IRC §263A): Under the uniform capitalization (UNICAP) rules, you must capitalize all direct costs and an allocable part of indirect costs incurred from production or resale activities.

  • Indirect expenses like storage, administrative, and quality control expenses, must be capitalized into inventory and depreciated, amortized, or included as COGS.

  • However, smaller manufacturers with less than $29 million in gross receipts over the past three years may be exempt from UNICAP requirements, thus simplifying compliance and potentially reducing taxes.

Recommendation: Analyze your inventory valuation method to ensure it aligns with your financial goals. Consider using the LIFO (Last In, First Out) method if the cost of raw materials (like steel or polymers) is rising, as it reduces taxable income.

6. Excise Tax on Firearms and Ammunition (IRC §4181)

Firearms manufacturers are subject to federal excise taxes under IRC §4181. This tax applies to the sale of firearms and ammunition, typically at the first point of sale by the manufacturer or importer.

• Tax Rates:

  • 10% on pistols and revolvers.

  • 11% on other firearms, such as rifles and shotguns.

  • 11% on ammunition.

Forms and Payment: Manufacturers must file Form 720 (Quarterly Federal Excise Tax Return) and remit excise taxes on a quarterly basis. The tax is imposed when the firearms or ammunition are sold, but certain exemptions apply, such as sales to the military or law enforcement agencies (IRC §4221).

Recommendation: Review your excise tax obligations and ensure that you're maintaining compliance with all quarterly reporting requirements. Also, explore any potential exemptions for sales to specific sectors.

7. State and Local Tax Considerations

Firearms manufacturers should also be aware of state-specific tax incentives and sales tax obligations:

• Sales and Use Tax: Some states offer exemptions for manufacturing equipment purchases or provide credits for creating jobs in certain industries.

  Arizona offers sales tax exemptions for manufacturing equipment purchases and raw materials that become part of the final product through its Transaction Privilege Tax (TPT) system under A.R.S. §42-5061(B)(1).

  Texas offers a sales tax exemption for machinery and equipment used directly in manufacturing (Texas Tax Code §151.318). This exemption also applies to repair and replacement parts and certain consumables used in the production process.

  
  

• Property Tax Abatements: Many states and municipalities offer property tax abatements or credits for businesses that invest in facilities and create local jobs.

Recommendation: Engage with a local tax advisor familiar with your state’s specific incentives and tax requirements. Many states offer discretionary incentives that can reduce state tax burdens significantly.

8. Foreign-Derived Intangible Income (FDII) Deduction (IRC §250)

If your firearms manufacturing company exports products outside the United States, the FDII deduction can offer significant tax savings. Under IRC §250, companies can deduct 37.5% of their foreign-derived income, effectively reducing the tax rate on that income to 13.125%.

• Eligibility: To qualify, the income must derive from goods (like firearms or ammunition) sold to foreign buyers for use outside the United States.

Recommendation: Work with your CPA to analyze the proportion of your sales going to foreign customers and claim the FDII deduction where applicable.

Conclusion

Effective tax planning for firearms manufacturers involves leveraging federal and state incentives, choosing the right entity structure, and maximizing available deductions like R&D credits and capital expenditure incentives.

Compliance with excise tax regulations and consideration of export-related tax benefits are also critical components of a holistic tax strategy. Each strategy outlined above should be carefully considered and tailored to your business’s specific needs.

Consulting a tax professional who specializes in the firearms industry can help ensure that you maximize your tax benefits while remaining compliant with applicable laws.