Pay Attention To These 6 Tax-related Items in 2024

Kirsch CPA Group

Jan 02, 2024

What’s the tax outlook for manufacturers as 2024 begins? While certain provisions of the Tax Cuts and Jobs Act (TCJA) begin to phase out, other tax laws, including the Inflation Reduction Act (IRA) and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act, have begun to kick in. Thus, manufacturers can seize tax-saving opportunities but must be aware of potential challenges.

Here are six tax-related items to focus on this year:

1. Deductions for research and experimental (R&E) expenditures. Previously, under IRC Section 174, manufacturers could realize an immediate tax benefit from their qualified R&E expenditures by writing off the entire amount in the year 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. In the case of research conducted outside the United States, the amortization period is 15 years.

This change can have a huge impact on the first-year deduction. For example, if a manufacturer pays $150,000 in domestic R&E costs, the monthly amortization is $2,500, beginning with the midpoint of the year the company incurs the expenditures. Its first-year deduction will be only $15,000 ($2,500 x 6 months), compared to $150,000 under the pre-TCJA rules. However, if a manufacturer has steady R&E expenditures year to year, the tax impact of the change will lessen over time as the amortized amounts for previous years’ R&E expenditures can be deducted along with the amortized amount for the current-year’s expenditures.

2. Research credit. Manufacturers can continue to take advantage of the research credit under IRC Sec. 41 (commonly referred to as the “research and experimentation” or “research and development” credit) in 2024. The recent expansion of the research credit, together with limitations on the deductibility of R&E expenditures, make it a good time to revisit the credit.

For example, start-up businesses (less than five years old with less than $5 million in gross receipts) can use the credit to offset up to $250,000 in payroll taxes. And small businesses (those with average gross receipts under $50 million) can use the credit to reduce their alternative minimum tax (AMT) liability. Although the TCJA eliminated corporate AMT, pass-through entities may benefit from the AMT credit.

Note that under a change made by the TCJA, qualified research eligible for the credit is limited to expenditures that are treated as “specified research or experimental expenditures” under IRC Sec. 174. So, when classifying expenditures for deduction or amortization purposes, manufacturers should also consider the potential impact on the credit amount.

3. Advanced manufacturing investment (AMI) credit. Under the CHIPS Act, manufacturers can claim the AMI credit for producing semiconductors and specialized tooling equipment required in the semiconductor manufacturing process. This refundable credit equals 25% of the qualified investment in new buildings, facilities and other depreciable tangible property that’s integral to the process.

Qualified property eligible for the credit must be placed in service after 2022 and construction must begin before 2027. In effect, this gives manufacturers a five-year window of opportunity to secure this credit.

4. Advanced manufacturing production (AMP) credit. The IRA introduced the AMP credit (Sec. 45X) to support solar, wind and battery component manufacturers. As part of the transition to green energy sources, the AMP credit is designed to promote the development of a domestic supply chain for renewable energy technology and energy storage.

The credit is available for equipment and minerals produced in the United States after 2022 and before 2033. The base rate of the credit depends on the specific eligible component being manufactured. Significantly, the credit begins to phase out in 2030 for manufactured components, but not for production of critical minerals.

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 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. To claim the credit, a manufacturer must make an application to the U.S. Department of Energy.

6. Bonus depreciation. For 2024, businesses may immediately deduct 60% of the costs of eligible equipment and interior improvements to commercial buildings in the year they’re placed in service. This is down from 80% for 2023, and the percentage will continue to drop to 40% in 2025 and 20% in 2026. After 2026, absent new legislation, bonus depreciation will no longer be available.

Fortunately, manufactures will still have the opportunity to fully deduct these costs in the year the equipment or improvement is placed in service under Section 179 expensing. But Sec. 179 expensing is subject to an annual limit ($1.22 million for 2024), and it begins to phase out when equipment purchases and improvements for the year exceed the applicable threshold ($3.05 million for 2024).

Manufacturers that plan to purchase equipment or make building improvements and won’t be able to fully deduct the expenses under Sec. 179 should consider placing those assets in service this year to take advantage of 60% bonus depreciation while it’s still available. Be aware, however, that increasing depreciation may restrict your ability to deduct business interest, so it’s important to balance these potentially competing tax breaks.

You undoubtedly know that business tax planning is complex. The above is just the tip of the iceberg when it comes to tax issues your manufacturing company will face in the new year. Contact us with questions regarding available tax credits or any other tax-related issues.

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