CHIPS Act Deep Dive Part 4: Unpacking the Complexities of the Many Tax Credits Under the CHIPS Act and the IRA of 2022

HOST: MATT BRADY: Hello and welcome to Cherry Bekaert's Industrial Industry Podcast. My name is Matt Brady, and I am the Industrial Industry Leader at Cherry Bekaert.

HOST: MATT BRADY: We welcome returning listeners and new listeners. We want to do more than core audit, tax, and compliance work; we want to provide proactive advice on items like the CHIPS Act, and this series is evidence of that.

HOST: MATT BRADY: For those who joined us previously, we have had three podcasts on the CHIPS Act so far. The first was an overview, the second covered one of the new credits, and the third discussed funding. Today is podcast number four in this series.

HOST: MATT BRADY: Today we'll discuss interactions between the CHIPS Act and the Inflation Reduction Act of 2022, the new Advanced Manufacturing credit, Section 45X PTC, and a few other topics. Before we get too far, I should introduce our guest, Ron Wainwright.

GUEST: RON WAINWRIGHT: Ron is a partner in our Strategic Tax Advisory Group. You'll recall his name from the content he provided in podcasts one, two, and three.

HOST: MATT BRADY: Ron, welcome back.

GUEST: RON WAINWRIGHT: Thank you, Matt. Good to be back, and thank you to our returning and new listeners.

HOST: MATT BRADY: Like we did in podcasts one through three, let's start with a short high-level overview of the CHIPS Act, then move into observations about its interaction with the Inflation Reduction Act of 2022.

GUEST: RON WAINWRIGHT: As Matt noted, our series concerns the CHIPS Act — Creating Helpful Incentives to Produce Semiconductors for America — which was signed into law on August 9, 2022, as part of the CHIPS and Science Act of 2022.

GUEST: RON WAINWRIGHT: The CHIPS Act is a $52.7 billion package that provides generous incentives to increase domestic semiconductor production. While the incentives are narrowly targeted, expanding semiconductor production will significantly benefit many manufacturers across the country.

GUEST: RON WAINWRIGHT: After August 9, 2022, the Inflation Reduction Act of 2022 was signed on August 16, 2022. The CHIPS Act authorized $52.7 billion and included appropriations totaling roughly $200 billion, so you can think of the CHIPS initiatives as approximately $250 billion focused on manufacturers.

GUEST: RON WAINWRIGHT: The Inflation Reduction Act of 2022 represents roughly $502 billion in provisions that also impact and benefit the manufacturing industry. Together, these laws present substantial opportunities for manufacturers.

HOST: MATT BRADY: Thanks for that overview. One question many listeners raised after prior episodes was about the new Advanced Manufacturing credit. Can you expand on that?

GUEST: RON WAINWRIGHT: Certainly. Our prior podcasts dug into the expansion known as Section 48D, the Advanced Manufacturing Investment Tax Credit (AMITC). The United States, which pioneered semiconductor technology, has become overly reliant on foreign producers. While U.S. companies still account for nearly half of industry revenues, the share of global semiconductor production in the U.S. fell from 37% in 1990 to about 12% today.

GUEST: RON WAINWRIGHT: This decline presents national and economic security concerns. The goal of the CHIPS Act and related programs is to reinvigorate U.S. manufacturing to retain high-skill, high-wage jobs and maintain technological leadership.

GUEST: RON WAINWRIGHT: The Advanced Manufacturing Investment Tax Credit, Section 48D, provides a 25% investment tax credit for investments in semiconductor manufacturing. The credit covers both manufacturing equipment and the construction of semiconductor manufacturing facilities, and it includes incentives for manufacturers of specialized tooling equipment required in semiconductor production.

GUEST: RON WAINWRIGHT: The intent is to restore U.S. leadership in semiconductor manufacturing. That investment tax credit will help narrow the foreign cost differential, alongside significant grants and funding under the CHIPS Act.

HOST: MATT BRADY: That context is helpful. Another credit you and I discussed is Section 45X. Can you explain how that fits in?

GUEST: RON WAINWRIGHT: Yes. The CHIPS Act focuses specifically on semiconductor manufacturing, but the Inflation Reduction Act broadens incentives across energy and advanced manufacturing sectors. In the Internal Revenue Code, production tax credits are generally in Section 45 and investment tax credits are in Section 48.

GUEST: RON WAINWRIGHT: Section 48D is an investment tax credit; Section 45X is a new production tax credit introduced in the Inflation Reduction Act of 2022. Section 45X targets manufacturers of eligible components that are produced and sold by a taxpayer to an unrelated party after 2022, and it generates substantial credits.

GUEST: RON WAINWRIGHT: The production tax credit applies to manufacturers producing specific components used in clean or alternative energy systems. Eligible components include, among others, PV cells, PV wafers, solar-grade polysilicon, solar modules, inverters, battery project components, wind turbine blades and nacelles, torque tubes, and structural fasteners.

GUEST: RON WAINWRIGHT: Section 45X is available beginning in 2023 and for components sold through 2032, effectively a 10-year credit. The credit amounts vary by component. For example, a thin-film photovoltaic cell may qualify for four cents per watt, a PV wafer may qualify for $12 per square meter, certain wind energy components may qualify for percentage-based credits such as 10 percent, and torque tubes may qualify for 87 cents per kilogram.

GUEST: RON WAINWRIGHT: Eligibility and the specific credit amount depend on the component manufactured and the sales to an unrelated party beginning in 2023.

HOST: MATT BRADY: Credits clearly produce tax savings, which is attractive. You also mentioned the Advanced Energy Project credit; can you connect that to these other credits?

GUEST: RON WAINWRIGHT: The Inflation Reduction Act revised and extended the Advanced Energy Project credit, Section 48C. This is an investment tax credit available for a wide range of renewable energy equipment and related manufacturing facilities.

GUEST: RON WAINWRIGHT: The IRA allocated $10 billion of Section 48C credits to manufacturing facilities that produce equipment used in clean energy systems. The base credit rate is 6 percent, and a manufacturer can earn up to a five-times multiplier, often referred to as the bonus credit, bringing the effective credit much higher.

GUEST: RON WAINWRIGHT: The bonus multiplier depends on meeting the IRA’s prevailing wage and apprenticeship requirements. Guidance on implementation has not yet been issued and likely will not be available until next year, so manufacturers should begin planning now for Section 48C and related credits.

GUEST: RON WAINWRIGHT: Section 45X ties to the Advanced Manufacturing credit discussion, and Section 48C is another significant opportunity that can apply by facility or by production of equipment, depending on the statutory application.

HOST: MATT BRADY: From your perspective, what do the CHIPS Act and the Inflation Reduction Act of 2022 do for industrial manufacturing positioning in the U.S.?

GUEST: RON WAINWRIGHT: The industrial manufacturing industry is poised for substantial growth. The breadth of definitions and incentives across the CHIPS Act and the Inflation Reduction Act create extensive opportunities for investment tax credits, production tax credits, grants, and guaranteed loans.

GUEST: RON WAINWRIGHT: Over the next five years, we anticipate close to $750 billion of capital flowing into manufacturing-related incentives and programs, which will drive investment in semiconductors and in components for clean and alternative energy systems.

GUEST: RON WAINWRIGHT: The CHIPS Act aims to restore U.S. leadership in semiconductor manufacturing, while the Inflation Reduction Act seeks to make the U.S. a leader in manufacturing components for clean energy and other technology systems. These policies represent a potential renaissance for industrial clients.

GUEST: RON WAINWRIGHT: From 2022 through 2024, the CHIPS Act and the Inflation Reduction Act expand and modify Sections 45 and 48 credits. From 2025 through 2032, the IRA establishes technology-neutral production and investment tax credits, referred to as the Clean Energy Production Credit and the Clean Energy Investment Tax Credit, which introduce additional complexity and planning considerations.

HOST: MATT BRADY: There’s a lot to cover, so we originally planned four podcasts but will extend the series. One topic listeners are asking about is how to monetize the new energy credits. Can you preview that for our next episode?

GUEST: RON WAINWRIGHT: There are two key concepts for monetizing credits created by the Inflation Reduction Act. First, direct pay allows certain taxpayers, in specified circumstances, to elect direct payment of the tax credit from the federal government for eligible ITCs or PTCs.

GUEST: RON WAINWRIGHT: Second, transferability allows a taxpayer to transfer all or part of a tax credit to an unrelated taxpayer in exchange for cash. This creates a market for selling credits that the taxpayer cannot fully utilize.

GUEST: RON WAINWRIGHT: Some credits, such as certain aspects of Section 45X, are eligible for direct pay. Transferability is broader and may apply to multiple credit types. We will dive deeper into both mechanisms in podcast number five.

HOST: MATT BRADY: That’s a helpful preview. We will cover monetization in podcast five, then follow with a sixth episode on the Section 45Q credit for carbon oxide sequestration, and a seventh on technology-neutral credits.

HOST: MATT BRADY: Ron, thank you for joining us today. For listeners who haven’t heard podcasts one through three, those episodes are available on cbh.com, covering the overview, funding mechanisms, and the Advanced Manufacturing credit in detail.

GUEST: RON WAINWRIGHT: Thank you, Matt. There’s a lot of energy, pun intended, around the CHIPS Act and the Inflation Reduction Act credits and incentives that manufacturers can leverage. We look forward to continuing the series.

HOST: MATT BRADY: We appreciate our listeners. We will publish episodes five, six, and seven in the coming weeks. Cherry Bekaert stands ready to help manufacturers navigate these opportunities. Have a great day.