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What are examples of direct costs?
Direct costs include all of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on the trade or business that are deductible as business expenses under the IRC and identified as direct costs in your managerial or cost accounting records. This includes depreciation expense computed under the IRC in effect for Wisconsin that are classified as direct costs.
There are no specific examples of direct costs provided in the statutes because not every business operation will account for direct and indirect costs in the same manner. Because of this variability, the determination of direct costs relies, in part, on the taxpayer's accounting records.
In general, direct costs are those costs that directly benefit one specific project or good that is being produced. Examples of direct costs may include: production employee wages, supplies consumed directly in the production process, and costs of consultants used in producing the finished product.
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What are examples of indirect costs?
Indirect costs include all ordinary and necessary expenses paid or incurred during the taxable year in carrying on the trade or business that are deductible as business expenses under the IRC, other than cost of goods sold and direct costs, and identified as indirect costs in your managerial or cost accounting records. This includes depreciation expenses computed under the IRC in effect for Wisconsin that are classified as indirect costs.
Similar to direct costs, there are no specific examples of indirect costs provided in the statutes because not every business operation will account for direct and indirect costs in the same manner. Because of this variability, the determination of indirect costs relies, in part, on the taxpayer's accounting records.
In general, indirect costs are costs that benefit more than one specific project or good that is being produced and cannot be easily traced to a single project or good being produced. Examples of indirect costs may include: building rent, legal expenses, business insurance, advertising expenses, accounting and administrative salaries, office supplies, and certain utilities.
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The Wisconsin Statutes indicate that direct and indirect costs include all of the claimant's ordinary and necessary expenses paid or incurred during the taxable year in carrying on the trade or business that are deductible as business expenses under the Internal Revenue Code. Is depreciation included as a direct or indirect cost when computing the credit?
Yes, depreciation is included as either a direct or indirect cost when computing the credit. Depreciation is considered an ordinary and necessary business expense under the IRC, and is therefore included as a cost of generating production gross receipts.
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Are guaranteed payments to partners considered a direct expense when calculating the manufacturing and agriculture credit?
If the guaranteed payments represent payments to a partner for services that are directly connected with producing the manufacturing production gross receipts, they would be allowed as a direct expense in computing the credit. However, if the guaranteed payments are paid for a reason not directly related to the manufacturing production gross receipts, they would not be included as a direct expense.
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Are state taxes a direct or indirect cost?
Depending on how the expense is classified in the managerial or accounting records, the amount deductible for state taxes under the IRC, as modified for Wisconsin, may be considered a direct or indirect cost.
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Are charitable donations/contributions a direct or indirect cost?
Charitable contributions are not deductible as business expenses under Internal Revenue Code and are therefore neither a direct nor indirect cost.
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I was subject to LIFO recapture (or similar change in accounting method) and as a result my cost of goods sold increased. How does this affect the computation of the manufacturing and agriculture credit?
A change in accounting method made for federal income tax purposes must also be made for Wisconsin franchise/income tax purposes if the method is authorized under the Internal Revenue Code. An increase in the cost of goods sold as a result of an accounting change for federal income purposes will also result in an increase in the cost of goods sold for Wisconsin franchise/income tax purposes, and the increased cost of goods sold amount will be used in computing the qualified production activities income portion of the manufacturing and agriculture credit.
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The amount of depreciation expense for federal and Wisconsin franchise/income tax purposes is different. Is the federal or Wisconsin depreciation expense used when computing the credit?
The depreciation expense to use in computing the credit is the amount of depreciation allowed under the Internal Revenue Code in effect for Wisconsin, so the Wisconsin amount is used.