6 Tax Breaks for Manufacturers in 2024
Manufacturers' Guide to 6 Key Tax Credit Opportunities
As 2024 opens, manufacturers face a changing tax landscape. While some provisions sunset, new opportunities arise under the Inflation Reduction Act (IRA) and CHIPS Act. Read on for 6 key tax items manufacturers should prioritize.
1. Research & Experimentation
Deductions for research and development (R&D) expenditures change, requiring amortization generally over 5 years, with a half-year convention (15 years for research conducted outside the United States). While this impacts first-year deductions, manufacturers with steady R&E expenditures year to year, will find 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
Despite R&D deduction changes, the research credit under IRC Sec. 41 (commonly referred to as the “research and experimentation” or “research and development” credit) remains available.
Small businesses have several ways to benefit from the research credit. Startups (less than five years old with less than $5 million in revenue) can use it to directly offset up to $250,000 in payroll taxes. Other small businesses (with average revenue under $50 million) can apply the credit to reduce their alternative minimum tax (AMT) liability, even though corporate AMT was eliminated by the TCJA. This is because the credit can still be used by pass-through entities like partnerships and S corporations.
Since the TCJA limits the research credit to expenses that can be deducted or amortized under IRC Sec. 174, manufacturers should consider this when classifying their R&D costs to maximize their available credit.
Manufacturers face a dynamic tax landscape in 2024, with opportunities in R&D, green energy incentives, and limited-time depreciation benefits.
3. Advanced manufacturing investment (AMI) credit
The CHIPS Act offers a powerful incentive for semiconductor manufacturers: a 25% refundable credit on qualified investments. This “AMI credit” applies to new buildings, facilities, and essential equipment purchased after 2022, but manufacturers must begin construction before 2027. It’s essentially a five-year window to claim this valuable credit, so act fast if you’re in the semiconductor game!
4. Advanced Manufacturing Production (AMP) Credit
The Inflation Reduction Act’s AMP credit (Sec. 45X) incentivizes U.S. production of solar, wind, and battery components for a robust domestic green energy supply chain. This credit applies to qualified equipment and minerals manufactured between 2022 and 2032, with rates varying by component. Notably, while the credit phases out for manufactured components in 2030, critical minerals production remains eligible, further propelling green energy independence.
5. Advanced Energy Project (AEP) Credit
The Inflation Reduction Act (IRA) injects $10 billion into the AEP credit, offering a financial lifeline to projects that advance clean energy and good jobs. This windfall targets three types of initiatives:
- Green Factories: Modernizing or building facilities to produce or recycle renewable energy equipment, energy-efficient machinery, carbon capture systems, or advanced vehicles.
- Emission Slashers: Upgrading existing industrial facilities with tech that cuts greenhouse gas emissions by at least 20%.
- Critical Materials Champions: Setting up new or expanding existing facilities to process, refine, or recycle crucial materials like 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
Businesses have a limited window to capitalize on a valuable tax deduction in 2024. The bonus depreciation rate for eligible equipment and interior building improvements stands at 60% this year, before falling to 40% in 2025, 20% in 2026, and absent new legislation will cease in 2027. This deduction can significantly lower taxable income, but careful planning is crucial.
While full expensing under Section 179 may be preferable, its limitations make the bonus depreciation attractive for some businesses. However, remember that increased depreciation may affect business interest deductions.
Business tax planning is complex, and this information is just the tip of the iceberg when it comes to addressing tax issues in your manufacturing company in 2024. Contact a Brady Ware tax professional to determine the optimal strategy for your specific situation.
Questions?
Kristin specializes in tax services, particularly for pass-through entities and complex individual matters. Her clients span industries like dealerships, real estate, wholesaling, and professional services. Her approach goes beyond compliance, addressing clients’ pain points with a genuine care that ensures understanding, compliance, and strategic insights.