The Inflation Reduction Act (IRA) of 2022 provides billions of dollars in direct funding, tax credits and other incentives aimed at the manufacturing sector. The goal of much of the bill’s funding is to encourage investments in “green” technologies like renewable energy and low- to zero-emission vehicles. Some of the IRA’s provisions provide direct benefits to manufacturers, while others may spur economic activity in ways that will benefit them indirectly. The following offers an overview of some of the parts of the IRA that could boost manufacturing over the next few years.
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The IRA renews some tax credits that had lapsed, expands others and creates several tax credits intended to encourage investment in renewable energy and other environmentally-conscious technologies.
The IRA creates a new tax credit known as the advanced manufacturing production credit. It provides credits to manufacturers who produce and sell components used in renewable energy production and storage, including wind and solar power. It is also available to businesses that process and sell “applicable critical minerals” like aluminum, cobalt, graphite, lithium and nickel.
This tax credit incentivizes investments in “advanced energy projects” that perform functions like producing or recycling renewable energy, reducing greenhouse gas emissions at existing facilities or sequestering carbon dioxide. The bill makes up to $10 billion in credits available.
The IRA extends the tax credit for facilities that generate electricity from renewable sources like solar, wind, biomass or geothermal through 2024. It also increases the amount of the tax credit and provides further incentives for businesses to meet prevailing wages in their areas.
This credit, a new creation of the IRA, provides tax credits for purchases of certain hybrid or electric vehicles manufactured entirely or partly in the U.S. The amount of the credit is twice as much for vehicles that run solely on electric power. The credit does not directly benefit manufacturers, in the sense that consumers, not manufacturers, may claim the credit. Encouraging the purchase of clean vehicles, however, has the potential to spur significant manufacturing growth.
The clean vehicle credit is similar in some ways to the qualified commercial clean vehicle credit. Both tax credits directly benefit consumers who purchase clean vehicles, and both can have a significant, if indirect beneficial effect on auto manufacturers by increasing demand for those vehicles. To qualify for this credit, the final assembly of the vehicle must take place in North America.
The IRA extends and expands the tax credit that is available for specified “energy properties” that involve clean or renewable energy. For most types of energy properties, the tax credit is available for anything on which construction begins by the end of 2024. For equipment that uses “the ground or ground water” to heat or cool a property, the IRA extends this deadline an additional 10 years to the end of 2034.
The IRA provides direct funding to various government agencies for programs that provide grants or make loans to businesses for certain purposes. As with the tax credits, the goal of these programs is to promote renewable energy and other green initiatives.
Congress established this loan program in the Energy Independence and Security Act of 2007. The Department of Energy (DOE) may loan money to U.S. auto manufacturers to fund projects that will increase fuel efficiency. Congress authorized up to $25 billion in loans at that time.
Section 50142 of the IRA provides an additional $3 billion to the DOE through September 30, 2028. It specifies that these funds may only go to loans for programs that will produce vehicles that “emit, under any possible operational mode or condition, low or zero exhaust emissions of greenhouse gases.”
This grant program originated with the Energy Policy Act of 2005. Congress directed the DOE to use the program “to encourage domestic production and sales of efficient hybrid and advanced diesel vehicles and components of those vehicles.”
The IRA, in § 50143, allocates $2 billion to the DOE through September 30, 2031 for “grants for domestic production of efficient hybrid, plug-in electric hybrid, plug-in electric drive, and hydrogen fuel cell electric vehicles.” It requires any recipient of a grant under this program to provide at least 50% of the cost of the project for which they will use the grant.
The provisions described here are only a few of the incentives included in the IRA. You can learn more about the bill’s opportunities by talking to a tax professional.
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