Webinar: Updates on Legislation Affecting Manufacturers

Highlights from the August 17, 2022, webinar hosted by James Dascenzo, CPA, Principal, and National Director of HBK Manufacturing Solutions, and Nicholas Demetrious, CPA, MBA, Principal, HBK Tax Advisory Group

The events of recent years relative to the pandemic have heightened the need to increase chip production in the U.S. U.S. share is currently 12 percent, down from 37 percent in 1990. China wants to control space by 2030. Most advanced chips are made in Taiwan. The CHIPS + Science Act, signed into law on August 9, commits $280 billion, much of which is not appropriated, to bolstering chip production in the U.S.

The bill had bipartisan support in the House and also in the Senate, indicating politicians on both sides of the aisle recognized the need to step up efforts for on-shoring chip production.

The CHIPS Act and Inflation Reduction Act complement each other. How politics and business go together is an interesting study.

CHIPS Act

Chips for America Fund; creates incentives to produce semiconductors. Total of $52.7 billion, $39 billion of which is set aside for incentive programs to promote manufacturing. $37 billion for assistance for construction and expansion of semiconductor fabrication facilities.

$2 billion for chips used in automotive and defense systems

$11 billion for semiconductor manufacturing research and workforce development

$2 billion for CHIPS for America Defense Fund

Plus:

$1.5 billion dedicated to a public wireless supply chain innovation fund to spur movement to open-architecture, software-based wireless technology. Designed to promote 5G networks throughout the U.S.

The biggest chunk of $200 billion is designated to support R&D in advance and emerging technologies. Much of the money will go to the National Science Foundation to increase research. The U.S. Energy Department’s Office of Science will receive up to $50 billion to enhance a series of programs focused on clean energy, nuclear physics and high-intensive lasers as they relate to semiconductor manufacturing. Also, the bill will establish 20 regional technology hubs to create more chip manufacturing employment.

The bill also includes money for NASA for research that will lead to bringing Americans to Mars and put the first woman and first person of color on the Moon.

The advance manufacturing investment credit: a 25% tax credit on qualifying investments or tangible property

Must be integral to the operation of an advanced manufacturing facility.

Must be constructed, reconstructed, or erected by the taxpayer.

Used for building and structural components, not for office, administrative or other functions unrelated to manufacturing. Demonstrating that will require a cost segregation study.

Can be used as a payment against tax for the year of the credit.

Subject to recapture but recapture amounts drop by 20% per year.

Reduces the basis of the property by the amount of the credit.

CHIPS Act investments should free us from exposure to Chinese supply chain issues and restore manufacturing jobs in U.S., including 3,000 new jobs with Intel in Ohio. That and spinoff businesses and employment combine for a potential boon to Ohio’s economy and other Midwest states. Likely to take three to five years to build Intel plant and get it running. South Korea will spend 450 billion and China will invest $1 trillion in semiconductor production over the next ten years. These investments will improve our viability in this very important industry.

Inflation Reduction Act

Signed into law August 16 by President Biden.

Whether or not it will reduce inflations is up for debate.

There are tax implications for some large companies and a slew of legislation to provide new credits and extend existing credits for clean energy.

Boosts budgets for the IRS whose resources have been gutted in recent years. Added IRS support is not designed to affect taxpayers making less than $400,000 per year.

Provides for an excise tax on large company stock buy-backs.

Returns a corporate minimum tax of 15 percent of the corporations’ adjusted financial statement income (AFSI) over its corporate AMT foreign tax credit. Applies to C-corps with an average annual incomes of more than $1 billion AFSI.

Has some adjustments, including taking accelerated depreciation and foreign tax credits: applied to taxable years beginning after 2022.

Designed to base current year tax on book income, which can be larger than tax income. Represents a change in the dynamics of U.S. tax law, where corporate taxes are generated from book income.

Excise tax of 1 percent on stock buy-backs by publicly traded corporations for tax years after 2022. Should not affect small, closely held businesses.

Extends excess business loss limitation for non-corporate taxpayers two years. Won’t be able to take a business loss deduction of more than $524,000 for joint filers, $262,000, filing individually. Any excess carries forward like a net operating loss. Excess business loss limitation was included in the Tax Cuts and Jobs Act.

IRS funding:

Funding had been reduced or cut in recent years leaving IRS with a lack of workers and outdated equipment.

Inadequacies became apparent during the pandemic.

Funding of $80 billion is to close the “tax gap” which is the difference between what should be collected by the IRS and what is actually collected.

Wants to hire 87,000 new workers over the next decade.

No IRS changes other than funding, again, to be used over the next ten years.

Should improve customer service and increase audits on large corporations.

The Act also:

Extends for three years Affordable Care Act subsidies ($84 billion)

Prescription drug reform to lower drug prices ($288 billion); Excise tax on drug companies that don’t comply could be onerous

Drought relief ($5 billion)

Intends to provide for a deficit reduction of $308 billion

Extends the insurance tax credit

Electric Vehicle tax credits

Extends current $7,500 EV tax credit through 2032

Credit of $4,000 for used cars priced $25,000 or less

Removes 2000,000 per manufacturer vehicle cap beginning in 2023

Requires U.S. assembly and encourages domestic sourcing of key battery materials

Income thresholds for buyers; cost limitations on vehicles

Applies for some plug-in hybrids

Clean energy tax credits:

Clean hydrogen production

Advanced manufacturing production

Nuclear power production

Extension of renewable electricity production

New clean energy products

Credit for residential clean energy

Credit for energy efficiency home improvements

-Deduction for energy improvements in commercial buildings

-R&D tax credits of up to $250,000 against payroll taxes for businesses with less than $5 million gross receipts and less than five years old

Many of the tax increases that were included in the Build Back Better plan are not in the Inflation Reduction Act.