Manufacturing

Article Autumn Hines

As manufacturers close out year-end reporting, one accounting issue continues to surface across the industry: the treatment of tariffs and import duties in inventory and the broader financial statements.

While the accounting guidance itself is not new, the operational reality has proven far more complex. Tariffs are no longer a peripheral cost consideration. For many manufacturers, they represent a material component of product cost that directly affects margins, pricing decisions, and reported financial results.

The Accounting Framework is Clear — Execution is Not

Under Accounting Standards Codification (ASC) 330, tariffs and other import duties are capitalizable as inventory costs. These costs should be included in inventory and recognized in cost of sales only when the related inventory is sold, and the associated revenue is recognized.

At a conceptual level, this treatment is straightforward. In practice, however, many manufacturers struggle to capture, allocate, and consistently capitalize tariff costs—particularly when tariffs apply across multiple products, suppliers, or shipment periods.

System limitations, fragmented data, and tariff invoices that span numerous inventory items often make direct capitalization impractical. As a result, companies are forced to evaluate alternative methodologies that balance precision, consistency, and operational feasibility.

Inventory Costing Methods and Practical Tradeoffs

Manufacturers typically rely on one or more of the following approaches to reflect tariff costs in inventory:

  • Direct capitalization to inventory line items, which offer the highest level of precision, but often requires system capabilities that many organizations do not currently have.
  • Standard costing adjustments, where standard costs are modified to approximate tariff impacts once tariffs become applicable.
  • Estimated allocation methodologies, which allocate total tariff costs to inventory using a systematic approach, such as freight or overhead capitalization.

Each method introduces tradeoffs between accuracy, complexity, and audit supportability. Regardless of approach, consistency and documentation are critical to sustaining the methodology over time.

Tariffs Do Not Stop at Inventory

Accounting for tariff costs in inventory has implications that extend well beyond the cost of sales.

On the revenue side, manufacturers may attempt to recover tariff costs through price increases or contractual pass-throughs. While tariffs themselves do not affect revenue recognition, the structure and timing of price adjustments can—particularly when evaluated under ASC 606 as variable consideration or contract modifications.

Tariffs can also trigger broader financial reporting considerations, including:

  • Risk and uncertainty disclosures when tariff costs cannot be fully recovered through pricing or operational changes.
  • Concentration disclosures if tariff payments to government entities become significant relative to overall expenditures.
  • Margin volatility may impact forecasts, covenant compliance, and management’s assessment of future performance.

In more severe cases, sustained tariff pressure may also raise questions about a company’s ability to continue as a going concern.

Why This Matters Now

As global trade policies continue to evolve, tariff costs are increasingly dynamic and material. Manufacturers who treat tariffs as a period expense, fail to consistently capitalize them, or overlook their downstream financial statement effects risk misstated inventory balances, distorted margins, and heightened scrutiny during audits and financial reviews.

The issue is not whether tariffs should be capitalized. The challenge lies in operationalizing that requirement in a way that is accurate, repeatable, and aligned with the company’s systems and controls.

How Dean Dorton Can Help

Dean Dorton works with manufacturers across the industry to evaluate tariff accounting methodologies, assess system and process readiness, and understand the downstream financial statement implications of tariff costs.

If you have questions or would like assistance navigating the accounting and reporting impacts of tariffs, please contact Dean Dorton’s manufacturing industry experts.

Article Danielle Camara

When Governor Andy Beshear took Kentucky’s message to the World Economic Forum in Davos, the signal to global capital markets was clear: Kentucky is positioning itself as a low-friction, high-subsidy jurisdiction for capital-intensive manufacturing in the United States.

For financial sponsors, corporate development teams, and CFOs, the state’s appeal is not rooted in a headline tax rate alone. Instead, Kentucky differentiates itself through a deliberately engineered incentive framework that materially compresses upfront capital requirements and lowers long-run effective tax rates—particularly for large manufacturing investments in automotive, EV batteries, and advanced industrial production.

A Simple Statute, a Very Different Effective Tax Outcome

At the statutory level, Kentucky imposes a flat 5% corporate income tax on C-Corporations, a structure commonly used by foreign investors establishing U.S. operations. On its own, this rate is largely in line with regional peers.

The distinction emerges at the project level.

Kentucky relies heavily on performance-based incentives—primarily income tax credits and refundable sales tax mechanisms—that can effectively shelter a substantial portion of project-level income for a decade or more. For qualifying manufacturers, this often drives the effective state income tax burden well below the statutory rate during the most capital-sensitive phase of a project’s lifecycle.

For domestically owned, privately held businesses operating as S-Corporations or partnerships, the picture can be even more favorable. Kentucky’s individual income tax rate is currently 4% for 2025 and is scheduled to decline to 3.5%, contingent on state budget targets. While all entity types are subject to Kentucky’s Limited Liability Entity Tax (LLET), that tax is calculated on the lesser of gross receipts or profits, has a modest minimum, and is deductible against income tax—softening its overall economic impact.

The Core Incentive Tools Driving Manufacturing Economics

Kentucky’s manufacturing strategy is anchored by a set of complementary incentive programs that, when properly structured, create a meaningful incentive-stacking effect.

Kentucky Business Investment (KBI) is the state’s primary income tax incentive. For eligible manufacturing projects meeting investment, job creation, and wage thresholds, KBI can offset up to 100% of the state income tax generated by the project, typically over 10- to 15-year periods. From a financial modeling standpoint, this frequently reduces the Kentucky income tax line to near zero during the capital recovery phase—improving IRRs and early-year cash flow profiles.

For capital-intensive projects, however, the most immediate value often comes from the Kentucky Enterprise Initiative Act (KEIA). KEIA provides refunds of sales and use tax on construction materials permanently incorporated into buildings, as well as qualifying machinery, equipment, and certain R&D or data-processing assets. With a 6% sales tax rate, KEIA can reduce total project cost by several percentage points of gross capex—often translating into tens or hundreds of millions of dollars in savings on large-scale facilities.

Existing operators can further benefit from the Kentucky Reinvestment Act (KRA), which provides income tax credits tied to reinvestment in plant modernization, equipment upgrades, and automation. This is particularly relevant for Tier 1 and Tier 2 automotive suppliers navigating ongoing tooling cycles and the industry’s transition toward electrification.

Incentive Stacking in Practice

Taken together, Kentucky’s programs function as an integrated incentive-stacking model. A typical large manufacturing investment may simultaneously benefit from:

  • Multi-year income tax offsets under KBI
  • Upfront sales tax refunds under KEIA
  • Workforce training grants and credits
  • Local property tax abatements or tax increment financing

The result is not simply a lower tax rate—it is a fundamentally different capital cost and cash flow profile compared to non-incentivized jurisdictions.

This structure is especially well-suited to EV battery plants and automotive supply-chain investments. These projects are characterized by high upfront capital intensity, long depreciation schedules, and multi-year ramp periods before reaching steady-state margins. KEIA directly reduces invested capital, while KBI improves early-cycle cash flows and de-risks the ramp phase from a state-tax perspective.

Illustrative Economics: A $100 Million Manufacturing Facility

Consider a hypothetical $100 million automotive or industrial manufacturing project:

  • Eligible construction and equipment: $80 million
  • Sales tax avoided under KEIA: approximately $4.8 million
  • Effective project cost reduction: from $100.0 million to $95.2 million

That reduction alone can increase project IRR by roughly 50 to 80 basis points.

Assuming steady-state taxable income of $8 million, the Kentucky corporate income tax would normally total $400,000 per year. If KBI offsets 100% of that liability for 10 years, the nominal tax avoided is $4.0 million, with a net present value of approximately $2.7 million at an 8% discount rate.

Combined, KEIA and KBI can deliver incentive value approaching $7.5 million on a $100 million project—before accounting for workforce grants, local abatements, or infrastructure participation. In practice, total public support often reaches $9 to $12 million at this scale.

From an investment perspective, this typically results in:

  • IRR uplift of 100 to 200 basis points
  • Payback acceleration of 0.5 to 1.0 years
  • An effective Kentucky state income tax rate near zero for approximately a decade

The Bottom Line for Investors

Kentucky should not be evaluated solely as a 5% corporate tax state.

For qualifying manufacturing investments—particularly in automotive, EV, and advanced industrial sectors—it is more accurate to view Kentucky as a performance-driven, high-subsidy manufacturing platform. When incentives are properly navigated and layered, the state can deliver materially lower effective tax rates, reduced invested capital, and improved early-cycle cash flows that directly align with the financial realities of capital-intensive production.

For decision-makers modeling site selection, Kentucky’s value proposition lies not in its headline numbers, but in the project-level economics beneath them.

How Dean Dorton Can Help

Navigating Kentucky’s incentive landscape—and accurately modeling its impact on capital costs, cash flow, and returns—requires more than a surface-level understanding of statutory tax rates. Properly structuring, negotiating, and sequencing state and local incentives can materially change the economics of a manufacturing investment.

Dean Dorton works with domestic and international manufacturers to evaluate site selection alternatives, model project-level effective tax rates, and maximize available incentives across income, sales, property, and workforce programs.

If you are considering a manufacturing investment, expansion, or reinvestment in Kentucky—or benchmarking Kentucky against other states—contact Emir Hodzic to discuss how these incentive programs may apply to your project and how to integrate them into your financial and capital planning.

Article Autumn Hines

Back in December, I wrote an article titled “Navigating the M&A Landscape – A Banker’s Perspective on 2025,” where I shared a cautiously optimistic outlook on the year ahead. While much of that optimism still holds, the reality of 2025 has taken on new dimensions, particularly with the unexpected resurgence of tariff-related uncertainty. 

Deal activity remains uneven across the lower-middle market. We see strong interest and competitive processes in sectors where the target’s supply chain is not meaningfully connected to international markets, especially China. The debt markets, meanwhile, have meaningfully opened up in recent months—but just in time for buyers and lenders to begin overanalyzing tariff implications and retrenching in affected categories. 

But here’s the nuance: in today’s climate, buyers are drawing sharp lines between businesses with exposure to international supply chains and those without. For companies that rely directly on imported inputs (particularly from Asia), tariff volatility has introduced real friction into processes. In some cases, that’s meant valuation discounts. In others, buyers are simply pausing until conditions stabilize. 

One notable response: an increased emphasis on non-cash and contingent considerations such as earn-outs. These tools are helping buyers and sellers bridge gaps in valuation expectations while preserving alignment amid lingering uncertainty. 

That said, for companies that are domestically sourced or only minimally exposed, valuations are holding up—and in some cases, improving. Why? Buyers still have capital. Strategics are looking for tuck-ins. And the scarcity of quality assets is giving sellers with clean narratives a rare advantage. 

A recent Dean Dorton M&A engagement offers a perfect example. We just completed a fully marketed process with impressive levels of demand, attention, and high-quality offers from several parties. It’s no coincidence that the company in question had virtually no exposure to international supply chains. 

What to Watch as 2025 Unfolds 

We still believe 2025 is a strong seller’s market—but not for everyone at the same time. If your business is in a tariff-neutral zone, the wind is at your back. If your inputs come from across the Pacific, it may be worth watching the next few months closely before launching a process. 

That said, we believe the moment the rules of the game are defined, market activity will snap back. The underlying fundamentals — ample dry powder, limited deal flow, and eager buyer pools — are all in place to support a swift rebound in valuations and demand once trade policy clarity returns. 

Our job at Dean Dorton M&A is to help clients navigate that nuance. Valuation isn’t static. It’s a function of timing, market sentiment, and buyer psychology. Right now, those levers are tilting favorably for the right companies. 

Let us know if we can help you think through where your business sits and how the current environment could affect value and process strategy. 

Article Autumn Hines

The election of Donald Trump as the 47th President marks a new chapter in U.S. leadership, with potential policy shifts for businesses and investors. In his election night speech, Trump pledged to build a “strong, secure, and prosperous America.” Stakeholders now await details on proposed tax changes that could impact the U.S. and global economies. 

Planned tax changes that Donald Trump emphasized or discussed during the election campaign are essentially:

Extending the tax reliefs provided under the Tax Cuts and Jobs Act (TCJA), including: 

  • For companies:   
  • (Further) reduction of the corporate income tax rate from 21% to 20% and introduction of a “reduced” corporate income tax rate of 15% for certain qualified companies that manufacture their products in the USA 
  • Return of 100% bonus depreciation (Sec. 168(k)), increase in the small business election to expense depreciable assets (Sec. 179), and expansion of research and development tax credits 
  • For individuals/families:  
  • Increase in the child tax credit from USD 2,000/child to USD 5,000/child and extension of tax benefits for families 

Making the tax reliefs provided under the Tax Cuts and Jobs Act (TCJA) permanent, including: 

  • A further reduction in income tax is not ruled out, even if the current top income tax rate of 37% is maintained (instead of increased to 39.6%) 
  • Retaining the current estate and gift tax exemptions of USD 13.6 million (instead of a reduction to USD 5 million) 
  • Eliminating the $10,000 deduction limitation for state and local taxes (SALT) so that taxpayers could deduct them from their federal taxable income without limitation in the future 
  • Introducing a basic tariff of 10 to 20% on all imports into the USA and a tariff of 60% on imports into the USA from China 

In addition, numerous other measures are planned or under discussion, including: 

  • Exemption of social security benefits, tips, and overtime pay from income tax  
  • Introduction of a tax credit for family carers 
  • Abolition of tax credits for the purchase of electric vehicles and other products 
  • Creation of a deduction option for interest on automobile loans for vehicles that are manufactured in the USA 

What do Trump’s tax proposals mean for direct investments in the USA?

As of today, the tax proposals should be regarded as speculation. Although changes are to be expected, the timing, impact, and amount depend on the success of the Trump administration’s negotiations.  

Companies with US subsidiaries or individuals with US investments should monitor developments carefully and possibly review them with an advisor experienced in the USA. 

However, reducing the corporation tax rate to 15% for domestic manufacturers could present investment opportunities for European companies. In the future, it could be an option to expand their own production in the USA or possibly relocate from Europe to the USA. In the latter case, however, regulations on exit tax and the taxation of hidden reserves in Europe (e.g., relocation of functions) must be observed.  

Outlook 

Donald Trump’s election victory signals potential tax changes on the horizon. His proposals suggest a focus on incentivizing companies to produce within the United States, benefiting businesses with U.S.-based operations. While tax increases may not be on the table, Trump envisions imposing significant tariffs to protect the U.S. economy and fund tax cuts. These tariffs could pose challenges for international companies exporting to the U.S., particularly those based in Europe. 

If you have questions about how these potential changes could impact you and your business, please contact your Dean Dorton advisor. 

Article Autumn Hines

The SECURE 2.0 Act introduces significant changes to retirement plan contributions, particularly for high-income earners. One of the most important updates affects catch-up contributions—additional contributions that individuals aged 50 or older are allowed to make to their retirement account to help boost savings. For individuals earning over $145,000, these catch-up contributions must now be made through Roth 401(k) accounts. Here’s what employers need to know to stay compliant. 

What is Changing with Roth 401(k) Catch-Up Contributions? 

Starting in 2024, employees with earnings exceeding $145,000 will be required to make catch-up contributions via Roth 401(k) plans, which means the contributions will be made on an after-tax basis. This rule applies to qualified plans, including 401(k), 403(b), and 457(b) plans. However, it does not apply to SIMPLE IRAs. 

This change is designed to ensure that higher-income earners pay taxes on their catch-up contributions during their peak earning years, which could help reduce their tax burden during retirement.

Why This Matters for Employers 

The new rule could have significant implications for your employees and your retirement plan. High earners are typically the ones who can afford to make catch-up contributions. If your plan does not allow Roth 401(k) contributions, those employees will not be able to take full advantage of this opportunity. 

What Employers Should Do Now  

While SECURE 2.0 was set to take effect in 2024, the IRS announced a two-year transition period, delaying full implementation until 2026. This means employers have additional time to ensure their plans are updated to include Roth 401(k) provisions. 

Next Steps

Employers should review their retirement plans to ensure they allow Roth 401(k) contributions. If your plan is not yet updated, it’s important to make the necessary changes to stay compliant with SECURE 2.0. 

Need assistance with updating your plan? Contact your plan administrators today to ensure your retirement plan is SECURE 2.0 compliant. 

Article Autumn Hines

The mergers and acquisitions market stands at a pivotal juncture as we approach 2025. The turbulence of recent years, driven by inflationary pressures, rising interest rates, and geopolitical uncertainty, is giving way to a period of cautious optimism. For sellers, the upcoming year presents compelling opportunities, but success will require strategic foresight and a nuanced understanding of evolving market dynamics. While the recovery is unlikely to replicate the fervor of 2021, the foundation for a rebound is undeniably taking shape. Here’s our perspective on the 2025 M&A outlook and how we at Dean Dorton’s M&A Advisory Group are prepared to guide our clients through it. 

Key Developments in the M&A Market 

2024: A Stabilizing Economy 

The second half of 2024 marked a turning point for the global economy. As inflation moderated, unemployment held steady, and consumer spending remained resilient, central banks began signaling potential rate cuts, which in turn led to more stable capital markets. These developments, coupled with improving corporate confidence, are setting the stage for a more active M&A market in 2025. As we turn the calendar from 2024, several key themes are underpinning the M&A market: 

  • Strong Buyer Appetite
    Buyer interest in strategic acquisitions remains robust, driven by a combination of abundant capital and a renewed focus on growth through acquisitions. Across most sectors, heightened competition underscores the eagerness of both corporate and private equity buyers to seize strategic opportunities that will accelerate their market position. Companies are leveraging acquisitions not just to consolidate markets but also to secure transformative capabilities, while private equity firms, equipped with record levels of dry powder, are actively pursuing deals to enhance portfolio value and achieve higher returns. But at the same time, they are being very careful in selecting which deals they pursue and paying premium valuations for those companies with tangible growth levers. 
  • Valuations: Steady but Selective
    Valuations, which recalibrated during the post-pandemic economic slowdown, have remained steady throughout 2024. Despite a strong appetite for deal flow, buyers are maintaining disciplined pricing, prioritizing profitability and sustainable growth over speculative opportunities. For high-quality assets, competition among buyers will generate premium valuations. In the year ahead, sellers should anticipate a competitive bidding environment, perhaps not reaching the exuberance of 2021, but robust, nonetheless. 
  • Lower Borrowing Costs
    Borrowing rates in the U.S. have decreased from their 2023 peaks, easing financing constraints for leveraged buyouts. After reaching a peak of 11.0% in mid-2023, the all-in rate on leveraged loans for non-investment grade issuers fell to 9.7% by September 2024. These dynamics created a shadow rate-cut cycle even before the U.S. Federal Reserve began cutting its target rate later that month. The lower borrowing costs have benefited deal-making through the course of 2024, particularly amongst private equity buyers who rely on debt as an important financing source. 
  • Thawing Credit Markets
    Commercial loan growth has remained stagnant for much of 2024, but it isn’t for lack of available credit. Commercial banks have noticeably relaxed lending standards over the course of 2024. According to data from the Fed’s Senior Loan Officer Opinion Survey on Bank Lending Practices, commercial banks, in aggregate, tightened standards throughout 2023, but in Q1 of 2024, began loosening standards for Commercial and Industrial loans, thus making loans easier to obtain and less costly. This trend has continued throughout 2024 and could reasonably be expected to extend into coming quarters while the U.S. economy remains on stable footing. 
  • Rebound in Private Equity (PE) Activity
    Private equity firms, which adapted to macroeconomic uncertainties over the prior years by focusing on smaller deals and add-ons, are now gearing up for larger “platform” transactions. This has begun to take hold in 2024, with YTD private equity volumes up by 24% through the end of the third quarter compared to the same period in 2023. With record levels of dry powder and improving credit markets, financial buyers are expected to aggressively pursue deals in 2025. 

2025: A Potential Turning Point 

Four overarching trends suggest that 2025 could mark the beginning of a new M&A cycle: 

  1. Market Cycles and Pent-Up Demand 
    Historical trends indicate that M&A cycles typically last 12-24 months. Three years into a downturn, the market is overdue for a rebound. With $1 trillion of dry powder translating into $2 trillion of purchasing power with leverage, PE firms are under mounting pressure to deploy capital. Simultaneously, demographic factors—such as aging business owners—are pushing more sellers to market. 
  1. Macroeconomic Shifts 
    The Federal Reserve’s recent rate cuts have reduced the cost of capital, addressing a significant hurdle to deal-making. Stabilizing inflation and resilient consumer spending also boost confidence among buyers and sellers alike. 
  1. Strategic Growth Needs 
    Companies are increasingly using M&A to acquire capabilities, talent, and technology in response to transformative trends such as artificial intelligence and digitization. Inorganic strategies remain vital for driving growth in a low-growth economy. 
  1. Favorable credit markets 
    An extension of the trends observed in the credit markets over 2024, primarily lower costs and relaxed lending standards, would have an overwhelmingly positive impact on the M&A market. Lending is the lifeblood of M&A, and current market dynamics could sustain a significant uptick in M&A. 

While the outlook is positive, challenges persist: 

  • Valuation Gaps: Buyers and sellers continue to diverge on pricing expectations, with sellers often anchored to inflated valuations driven by enthusiasm that has played out in the public equity markets. 
  • Regulatory Scrutiny: Heightened regulatory oversight, particularly in sectors like technology and healthcare, remains a significant obstacle. Nearly 80% of dealmakers report facing increased regulatory hurdles. 
  • Geopolitical Risks: Global tensions and domestic election-related uncertainties could dampen market confidence. Both foreign affairs, such as the expansion of the wars in Ukraine and the Middle East, and domestic policy shifts, such as broadening tariffs, have the potential to disrupt markets. 

What Potential Sellers Should Focus on in 2025 

The M&A market in 2025 offers immense potential, but it also requires sellers to approach the process with a clear strategy and adaptability. Here’s how to navigate the landscape effectively: 

  1. Enter the Market Strategically 
    Sellers entering the market in 2025 will need to carefully consider both macroeconomic and industry-specific trends. Many market participants opined that the lack of activity in 2024 stemmed from a lack of quality deals to pursue. Understanding how your company fills a need in the market and knowing which buyers will most aggressively pursue a purchase will be key to developing a sale strategy. Sellers will also want to consider the qualitative factors that are important to them in a sale process, e.g., company legacy, employee retention, etc. There is an ample number of willing buyers scouring the market, and having a clear strategy on how to approach the market will lead to the best outcomes.
  1. Craft a Compelling Growth Narrative 
    Buyers in 2025 are likely to maintain rigorous due diligence standards, particularly after a period of heightened scrutiny in 2023 and 2024. Sellers should work with their advisors to be suitably prepared before entering the market with a focus on presenting a clear and compelling narrative by addressing key areas: 

    – Financial Integrity: Clear, audited financials demonstrating consistent growth and strong margins. 
    – Operational Efficiency: Streamlined operations with minimal legal or regulatory risks. 
    – Growth Trajectory: A clear path to achieving growth objectives under various economic scenarios. 

    Beyond presenting financials, sellers need to articulate a clear narrative that highlights their competitive advantages and prospects. 
  2. Building a Strong Advisory Team 
    Navigating the complexities of deal-making requires expert guidance. Investment bankers, legal advisors, and tax professionals will be instrumental in helping sellers achieve optimal outcomes. Wealth management advisors, too, play a pivotal role in helping business owners prepare for an exit and allocating proceeds post-close. 

Conclusion: A Year of Optimism

The M&A landscape in 2025 holds significant promise for well-prepared sellers. As economic conditions stabilize and buyers enter the market with renewed confidence and capital, the environment is ripe for strategic transactions. However, success will depend on careful timing, rigorous preparation, and alignment with the right partners. 

For those ready to seize the moment, 2025 promises to be a year of opportunity.  With the right advisory team, sellers can unlock substantial value and position themselves for success.