Manufacturers: Pay Attention to These 6 Tax-Related Items in 2024

What are the tax implications for manufacturers as 2024 begins? While some sections of the Tax Cuts and Jobs Act (TCJA) begin to expire, other tax laws, such as the Inflation Reduction Act (IRA) and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act, have begun to take effect. As a result, manufacturers can take advantage of tax breaks, but they must be wary of potential pitfalls.

Here are six tax-related topics to consider this year:

1. Deductions for research and development (R&D) expenses. Under IRC Section 174, manufacturers could previously get an immediate tax benefit from eligible R&E expenditures by deducting the entire amount in the year the expenditures were paid or incurred. Beginning with expenditures paid or incurred after 2021, the TCJA requires R&E expenditures to be amortized, generally over five years, with a half-year convention. The amortization time for research performed outside of the United States is 15 years.This modification can have a significant impact on the first-year deduction. For example, if a manufacturer spends $150,000 on domestic R&E, the monthly amortization is $2,500 starting at the midpoint of the fiscal year in which the expenditures are incurred. Its first-year deduction will be $15,000 ($2,500 x 6 months), rather than $150,000 under pre-TCJA requirements. However, if a manufacturer’s R&E expenditures are consistent from year to year, the tax impact of the shift will reduce over time because the amortized amounts for past years’ R&E expenditures can be deducted alongside the amortized amount for current-year expenditures.

2. Research Credit. Manufacturers can continue to claim the IRC Sec. 41 research credit (also known as the “research and experimentation” or “research and development” credit) in 2024. The recent expansion of the research credit, combined with limitations on the deductibility of R&E expenses, makes now an excellent moment to revisit the credit.Start-up businesses, for example, can use the credit to offset up to $250,000 in payroll taxes (if they are less than five years old and have less than $5 million in gross receipts). Furthermore, small businesses (those with typical gross receipts of less than $50 million) can use the credit to lower their AMT burden. Despite the fact that the TCJA repealed corporate AMT, pass-through entities may be eligible for the AMT credit.As a result of a change made by the TCJA, qualified research eligible for the credit is now limited to expenditures classified as “specified research or experimental expenditures” under IRC Sec. 174. Manufacturers should evaluate the potential impact on the credit amount when classifying expenses for deduction or amortization purposes.
3. Advanced manufacturing investment (AMI) credit. Under the CHIPS Act manufacturers can claim the AMI credit when producing semiconductors and specialized tooling equipment used in the semiconductor manufacturing process. This refundable credit is equal to 25% of the qualified investment in new buildings, facilities, and other depreciable tangible property used in the process.Qualified property must be placed in operation after 2022, and building must commence before 2027. This effectively offers manufacturers a five-year window to secure this credit.

4. Advanced manufacturing production (AMP) credit. The IRA established the AMP credit (Sec. 45X) to assist manufacturers of solar, wind, and battery components. The AMP credit is intended to support the establishment of a domestic supply chain for renewable energy technology and energy storage as part of the shift to green energy sources.The credit is available for US-made equipment and minerals produced after 2022 but before 2033. The credit’s base rate is determined by the eligible component being manufactured. Notably, the credit begins to phase out in 2030 for manufactured components but not for critical mineral production.

5. Advanced energy project (AEP) credit. The IRA extends and expands the AEP 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 credit starts at 6% of qualified investments and rises to 30% for projects that meet prevailing wage and apprenticeship requirements. The legislation also reserves 40% of the $10 billion for investments in certain “energy communities.” This term refers to economically depressed communities that rely largely on fossil fuels, or have done so in the past. To be eligible for the credit, a manufacturer must submit an application to the US Department of Energy.

6. Bonus depreciation. Beginning in 2024, businesses may deduct 60% of the costs of qualified equipment and interior improvements to commercial buildings in the year they are placed in operation. This is down from 80% in 2023, and it will fall to 40% in 2025 and 20% in 2026. Bonus depreciation will be phased out after 2026 unless new legislation is enacted.Fortunately, manufacturers will still be able to completely deduct these costs in the year the equipment or improvement is placed in operation under Section 179. However, Sec. 179 expensing is subject to an annual limit ($1.22 million in 2024), and it begins to phase out when annual equipment purchases and renovations surpass the applicable threshold ($3.05 million in 2024).Manufacturers who intend to purchase equipment or make building improvements but will be unable to completely deduct the costs under Sec. 179 should consider putting those assets into service this year to take advantage of the 60% bonus depreciation while it is still available. However, increasing depreciation may limit your ability to deduct business interest, so you must weigh these potentially competing tax incentives.

Business tax planning is complicated. When it comes to tax challenges that your manufacturing company may encounter in the new year, the list above is simply the tip of the iceberg. Please contact us if you have any questions about available tax credits or any other tax-related issues.

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