The manufacturing industry will face several changes in federal tax law in 2024 thanks to the Tax Cuts and Jobs Act (TCJA) of 2017. New or expanded tax credits are also available to encourage certain types of manufacturing activities, therefore manufacturing businesses may want to explore opportunities presented by these tax credits. They should also prepare themselves for changes to bonus depreciation rules and the tax treatment of expenditures related to research and development (R&D). That said, pending legislation could reverse or make further changes to some of these tax rules. An experienced tax professional can help manufacturing businesses stay abreast of the latest developments.
The TCJA made several changes to the Internal Revenue Code (IRC) that affect the manufacturing industry.
Before January 1, 2022, § 174 of the IRC allowed businesses to deduct R&D expenditures. The TCJA changed this beginning with the tax year 2022. Manufacturing businesses must now amortize these expenditures over five years. For any R&D expenditures that are attributable to research conducted outside of the U.S., Puerto Rico or any other U.S. territory, the amortization period is 15 years. There is talk of this treatment being reversed in the upcoming pending legislation. Manufacturing businesses may want to consider extending their 2023 returns to wait and see if the pending legislation goes through. Speaking with a tax professional can help manufacturing businesses decide if that is a decision they want to make.
The TCJA expanded eligibility for the bonus depreciation deduction under § 168(k) of the IRC, but it also set a phaseout schedule. From September 27, 2017 until the end of 2022, taxpayers could deduct 100% of the cost of certain types of property during the year they placed those items into service.
The deduction phaseout began on January 1, 2023, when the percentage of the deduction decreased to 80%. The decreases will continue as follows:
This phase out is also being discussed in the upcoming pending legislation, and there is hope that bonus will revert back to being 100% deductible. Even if bonus depreciation does phase out, businesses can still utilize section 179 depreciation. There are specific rules related to Section 179, and businesses should speak with a qualified tax professional to determine if that deduction is a good option for them to consider in the upcoming years when bonus is being reduced.
Congress passed two laws in 2022 that expanded existing tax credits or created new ones intended to encourage certain types of manufacturing or investments: The Inflation Reduction Act (IRA) and the CHIPS Act. Several of these credits are likely to be of particular interest to manufacturing businesses.
The IRA created the advanced manufacturing production credit, found in IRC § 45X, to promote the manufacturing and sale of components used in clean and renewable energy production. The amount of the credit depends on the type of component produced and sold. Components that may be eligible for the credit include:
The credit became available on January 1, 2023. It will begin to phase out in 2030 when it decreases to 75% of the amount described in § 45X. It will decrease by an additional 25% each year, reaching zero in 2033.
Congress created the advanced energy project credit in 2009 by adding § 48C to the IRC. The IRA allocated $10 billion towards the credit. Of that amount, it reserved $4 billion for investments in certain designated communities.
The credit is available for investments in projects that establish, expand or refurbish:
For manufacturing companies that meet “prevailing wage and apprenticeship requirements,” the amount of the tax credit is 30% of their investment. The credit is equal to 6% of the investment otherwise.
The CHIPS Act created a new credit in § 48D of the IRC to encourage semiconductor manufacturing. It provides a credit equal to 25% of the amount of investment in facilities that manufacture “semiconductors or semiconductor manufacturing equipment.”
The credit became available on January 1, 2023. It will be available for investments made through the end of 2026. Investments in projects that begin construction on or after January 1, 2027 will not be eligible for the credit.
Congress routinely makes changes to the IRC. The Build It in America Act (H.R. 3938) is currently pending in Congress as part of a trio of bills known as the American Families and Jobs Act. As currently written, the bill would:
The House Ways and Means Committee reported favorably on the bill in June 2023. It has not received any further attention since then.
Manufacturing businesses have important obligations and opportunities under federal tax law. Staying on top of changes in the law is challenging. A tax professional with experience in the manufacturing industry can help keep businesses up-to-date.
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