A manufacturer’s profit is built one part, one order and one production run at a time. Most accounting systems, however, report on the business as a whole, while the decisions that matter most, such as what to quote, what to make and what to stop making, are made at the product level. Our work with Colorado manufacturers begins by connecting the two.
Do you know what each product truly costs to make?
True product cost includes direct materials, direct labor and an appropriate share of overhead: machine time, setup, supervision, utilities and the building itself. When overhead is omitted from the calculation, or spread evenly regardless of how each product actually uses the shop, some items quietly subsidize others.
Consider a machine shop that sells a part for $48. Materials are $18 and direct labor is $12, so the owner sees an $18 margin. The part, however, requires long setups on the busiest machine, and once overhead is allocated by machine hours, its share is $14 rather than the $8 the shop had assumed. The real margin is $4, and across a few thousand units, pricing that appeared healthy is barely breaking even.
The framework is straightforward. First, determine what drives overhead in your shop, whether machine hours, labor hours or another measure, and allocate it on that basis. Then review margins by product and by customer at least quarterly, and let the results inform your next round of quotes.
How should a manufacturer value inventory for tax purposes?
The applicable rules depend on the size of the business. For 2026, a manufacturer with average annual gross receipts of $32 million or less over the prior three years meets the small business taxpayer test in Revenue Procedure 2025-32. That generally allows it to forgo the uniform capitalization rules, which otherwise require a portion of indirect costs to be capitalized into inventory, and to use the simpler inventory methods described in IRS Publication 538. Larger manufacturers must capitalize those costs and track them carefully.
Inventory for financial reporting and inventory for tax purposes can differ. We keep your management reports useful for running the business while ensuring that your tax return follows the method you are entitled to use.
Can a manufacturer claim the research credit?
Often, yes. Designing new products, building prototypes, developing tooling or improving a production process can all qualify when the work involves genuine technical uncertainty and a process of testing alternatives. The credit is based primarily on the wages of the people doing the work, together with supplies and some contract research. Because the claim rests on records of who did the work and why, documentation kept as the work happens is far more reliable than records reconstructed later.
The rules for deducting those costs have also changed. Under the 2025 tax law, domestic research and experimental costs can again be deducted in the year they are paid or incurred, for tax years beginning after December 31, 2024, as the IRS summarizes in its overview of the new law’s provisions. Newer companies with little income tax can elect to apply up to $500,000 of the credit against employer payroll taxes, according to the IRS page on the qualified small business payroll tax credit. Under the Form 6765 instructions, that election is available to companies with gross receipts under $5 million for the year and no gross receipts in any year before the five-year period ending with that year.
Which Colorado tax exemptions apply to manufacturers?
Colorado exempts qualifying manufacturing machinery from state sales and use tax. According to the Department of Revenue’s manufacturing guidance, the machinery must cost more than $500, be used in Colorado directly and predominantly in manufacturing goods for sale, and be depreciable with a useful life of at least one year. Only the first $150,000 of used machinery purchases in a tax period qualifies, and city and county taxes still apply unless the local government has adopted the exemption.
Ingredients and component parts that become part of your finished product are generally exempt as well. If you have paid tax on qualifying purchases, a refund claim may be possible.
How SBA CPA works with manufacturers
The manufacturer in our case study grew because of changes that began in its books. We established timely data collection, identified the true cost of sales, helped define the manufacturing cycle and supported the implementation of an ERP system, the software that connects orders, inventory, production and accounting. A new quoting system shortened turnaround, and tighter collections released cash that the owner reinvested in certifications and a sales team. If that kind of work fits where your company is headed, an introductory call is the place to start.