The end of the Tax Cuts and Jobs Act (TCJA) and the introduction of the Inflation Reduction Act (IRA) have ushered in a new era of tax credits and incentives for the manufacturing industry. As older legislation sunsets and new incentives are offered, staying on top of ever-changing tax laws is critical for maximizing tax savings while minimizing your tax burden. As manufacturers adjust to new amortization guidelines for research and development (R&D) expenditures, it’s equally prudent to take advantage of new tax benefits for the industry, like the CHIPS for America Act and the Advanced Manufacturing Production Credit, among many others.
- Manufacturers with R&D expenditures must now capitalize and amortize those expenses over five years rather than deduct them within the same tax year
- The IRA provides new tax incentives for those involved in advanced or green energy manufacturing
- Bonus depreciation has begun phasing out as of 2023 and the deduction amount businesses can make from a purchase will decrease by 20% each year until it sunsets
- Proposed legislation, introduced in both chambers of Congress, could potentially amend amortization requirements for R&D expenses, but not in time for the 2023 tax year
1. R&D Amortization Changes
The TCJA included a provision requiring taxpayers to capitalize and amortize R&D expenses which took effect after December 31, 2021. Businesses had previously been allowed to immediately deduct those expenses but are now instructed to amortize those R&D costs over five years unless the research is conducted outside the United States. In those cases, costs must be amortized over 15 years.
Companies must also capitalize research costs and classify them as an asset instead of an expense. Although R&D expense deductions have been affected by the amortization provision, federal R&D tax credits are still available to qualifying businesses. Some states have also reinstated state-level R&D tax credits for businesses.
2. CHIPS for America Act
The biggest tax impacts on the manufacturing industry have been through the Inflation Reduction Act and the CHIPS for America Act, both signed by President Biden in August 2022. The CHIPS for America Act, for the most part, is a government funding bill that aims to advance investments in semiconductor manufacturing in the United States. Semiconductors, or chips, are widely used in electronics and mechanical equipment, such as cell phones, automobiles and even missile guidance systems.
While the US has generated a lot of research into the small, but powerful electronic chips, it lags behind other countries in manufacturing them. As a result, these chip manufacturing centers have become clustered in certain areas, igniting fears that supply chain issues or delays could eventually impede the operations of companies that rely on those technologies.
Section 48D, otherwise known as the advanced manufacturing tax credit, was also enacted by the CHIPS Act. It provides a tax credit of 25% of a qualified investment for facilities that manufacture either semiconductors or the equipment to make semiconductors. If interested, taxpayers can choose to be treated as if they’ve made a tax payment instead of claiming the credit.
3. Advanced Manufacturing Production Credits
A wide-ranging piece of legislation, the IRA has introduced new and expanded existing tax incentives for manufacturers involved in green energy. The Advanced Manufacturing Production Credit supports manufacturers who produce solar, wind and battery components. It applies to any equipment produced within the US and sold between December 31, 2022 and December 31, 2032. The credit will begin to phase out starting in 2030, so it is only available for a limited time.
4. Advanced Energy Project Tax Credit
The Advanced Energy Project Credit, which was added to the IRA on May 31, 2023, allows manufacturers or other entities that invest in qualified advanced energy projects to apply for a tax credit through the Department of Energy. According to IRS guidelines, the tax credit equals:
- 30% of qualified investment costs for projects that meet prevailing wage and apprenticeship requirements
- 6% for projects that don’t meet prevailing wage and apprenticeship requirements
While projects that “produce property for refining or blending non-renewable transportation fuels are excluded” from taking advantage of the tax credit, qualifying projects include those that:
- Re-equip, expand or establish manufacturing or industrial facilities to recycle or produce specific advanced energy property as defined in Notice 2023- 18
- Install technology that reduces greenhouse gas emissions by at least 20% in industrial or manufacturing facilities
- Re-equip, expand or establish an industrial facility to refine, recycle or process critical materials
5. Bonus Depreciation Changes Take Effect in 2023
As of 2023, bonus depreciation has begun to phase out. While businesses were able to deduct 100% of a purchase made in 2021 on their 2022 tax year filing, bonus depreciation will be phased out and eventually sunset completely by 2027. In 2023, taxpayers can only deduct 80% of the bonus depreciation amount from a purchase made in 2022. Each year, the deductible amount will decrease by an additional 20% until the figure reaches zero.
While it is possible that the bonus depreciation rule will be extended by Congress, it’s advisable to move forward with the assumption that it won’t. Instead, manufacturers who expect to purchase big-ticket items within the next five years should do so now rather than a year or two down the road when the deduction will decrease exponentially.
Anders Manufacturing and Distribution advisors help clients develop long-term strategies to reduce costs and enhance profit margins, keeping your business running efficiently. Learn more about how our advisors can help you take advantage of tax incentives, and the associated costs, by contacting Anders below.All Insights