Take advantage of new tax incentives for manufacturers

Despite its name, the Inflation Reduction Act (IRA) does more than combat rising prices. According to the White House, the Act represents the “single largest investment in climate and clean energy solutions in American history.” The IRA contains several tax incentives that benefit manufacturers, including expanded deductions for energy-efficient commercial buildings, advanced energy project credits, advanced manufacturing production credits and enhanced research credits for start-ups. 

Energy-efficient commercial buildings deduction

Internal Revenue Code Section 179D allows owners (and certain tenants) of commercial buildings to immediately deduct (rather than depreciate) the cost of specific energy-efficient improvements. The deduction is available for investments in energy-efficient interior lighting, HVAC or hot water systems, or building envelope improvements (such as insulation, roofing, windows and doors) that meet certain energy savings targets.

Before the IRA, eligible taxpayers could deduct up to $1.88 per square foot for projects designed to reduce annual energy costs by at least 50% in comparison to specified standards (as certified by a licensed engineer or contractor). Partial deductions were also available (up to 63 cents per square foot) for improvements to a building system that achieved certain cost savings.

Starting with improvements made in 2023, the IRA increases the maximum deduction to $5 per square foot and reduces the required minimum energy savings from 50% to 25%. Rather than allowing partial deductions, the IRA provides for a sliding scale: The base deduction ranges from 50 cents per square foot for 25% energy savings to $1 per square foot for 50% energy savings. These limits increase to $2.50 and $5, respectively, for projects that meet prevailing wage rates and apprenticeship requirements.

Related Read: Proposed Regulations Regarding the IRA’s Clean Vehicle Credit

Advanced energy project credit

The IRA extends and expands the advanced energy project credit, allocating $10 billion to projects that:

• Re-equip, expand or establish an industrial or manufacturing facility for the production or recycling of qualifying renewable energy and energy-efficient equipment, carbon-capture equipment and advanced vehicles;
• Re-equip an industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at least 20%; or
• Re-equip, expand or establish an industrial facility for the processing, refining or recycling of critical materials (such as lithium, cobalt and nickel).

The base credit is 6% of qualifying investments and increases to 30% for projects that meet prevailing wage and apprenticeship requirements. The law also sets aside 40% of the $10 billion for investments in certain “energy communities.” This term refers to economically challenged communities that are, or have been, heavily dependent on fossil fuels. For the first round of financing, applicants must submit concept papers to the U.S. Department of Energy by July 31, 2023.

Advanced manufacturing production credit

The IRA creates a new production tax credit for domestic manufacturing of components for solar modules, wind turbines, battery cells and modules, and critical minerals processing. Credit amounts vary depending on the component.

The full credit is available through 2029. After that, it is reduced by 25% per year and eliminated after 2032.

Research credit

When it comes to the tax credit for “increasing research activities,” younger companies are often at a disadvantage. That is because they may have little or no taxable income and resulting tax against which to apply these credits (although the credits may be carried over to future years).

To assist start-ups, the Protecting Americans from Tax Hikes Act of 2015 already allowed companies that are less than five years old, with less than $5 million in annual gross receipts, to claim research credits against up to $250,000 in Social Security tax liability. The IRA enhances this benefit, allowing start-ups to also claim research credits against the 1.45% Medicare portion of federal payroll tax, up to a limit of $250,000.

Do not leave money on the table

These are just a few of the IRA’s many tax breaks for U.S. manufacturers. Your tax advisor can help you determine which incentives make sense for your business.

Related Read: The Inflation Reduction Act Includes Wide-Ranging Tax Provisions

For more information on implementing a rolling forecast, contact Seamus Donoghue at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.