CHIPS Act Deep Dive Part 5: New Ways to Monetize Energy Tax Credits for the Industrial Industry

HOST: Hello and welcome to Cherry Bekaert’s industrial industry podcast. My name is Matt Brady, and I am the Industrial Industry Leader here at Cherry Bekaert.

We would like to welcome our returning listeners and thank you for tuning back in, not only for this series but for all our other podcasts. For our new listeners, we appreciate you joining us.

At Cherry Bekaert, we want to do more than core audit and tax compliance. We want to provide proactive advice, and the series we have been doing around the CHIPS Act is evidence of just that.

We have had three podcasts on the CHIPS Act so far. The first was an overview, the second was regarding one of the new credits, and the third covered funding.

Today we are joining you for podcast number four in this series. We are going to discuss the interactions between the CHIPS Act and the Inflation Reduction Act of 2022, as well as the new Advanced Manufacturing Credit, Section 45X, and other topics.

Before we get too far, I would be remiss if I didn't introduce our guest, Ron Wright. Ron is a partner in our Strategic Tax Advisory Group, and you will recall his name from the content he provided in our previous podcasts. Ron, welcome back.

RON WRIGHT: Thank you, Matt. It is good to be back, and thank you to our returning and new listeners today.

HOST: Ron, maybe we can kick off with a short, high-level overview of the CHIPS Act. From there, you can share your observations regarding the interaction between the CHIPS Act and the Inflation Reduction Act of 2022.

RON WRIGHT: Thank you, Matt. As Matt commented, our series has been regarding the CHIPS Act, which stands for Creating Helpful Incentives to Produce Semiconductors for America.

The CHIPS Act was signed into law on August 9, 2022, by President Biden as part of the CHIPS and Science Act of 2022. It is a $52.7 billion package providing generous tax incentives to industrial and manufacturing companies to increase the domestic production of semiconductors.

While the incentives are narrowly targeted, the expansion of semiconductor production will significantly benefit many manufacturers across the country.

We felt it was appropriate to transition because, post-August 9, we saw a second landmark piece of tax legislation: the Inflation Reduction Act of 2022, signed on August 16.

The CHIPS Act has an authorization of $52.7 billion, but more importantly, it has appropriations of $200 billion. Total funding is approximately $250 billion focused on our manufacturers.

The Inflation Reduction Act of 2022 provides an additional $52 billion. There are numerous provisions within that act that impact and benefit the manufacturing industry.

HOST: I appreciate that high-level overview. One topic our listeners have requested more feedback on is the new Advanced Manufacturing Credit we discussed in a prior episode. Can we talk more about that?

RON WRIGHT: Correct. Our previous podcast on the Advanced Manufacturing Credit began to dig into the new or expanded Section 48D, or the Advanced Manufacturing Investment Tax Credit.

The United States developed and pioneered chips technology but currently finds itself too reliant on foreign producers of semiconductors.

American companies still dominate the global semiconductor industry, accounting for nearly half of all revenue. However, the share of global production in the U.S. has dropped from 37% in 1990 to just 12% today.

This is a national and economic security threat. The dynamics must change with respect to United States manufacturing to ensure we remain at the forefront of technological development.

There is almost nothing we touch today that does not have some form of a semiconductor or chip in it. We want to ensure we retain those high-skill, high-wage jobs in the United States.

The CHIPS Act includes significant grants and funding programs to address the foreign cost differential. When we discuss the Advanced Manufacturing Credit, or AMC, it was based on two bipartisan bills.

The Advanced Manufacturing Investment Tax Credit now provides a 25% Investment Tax Credit (ITC) for investments made in semiconductor manufacturing.

The credit covers both manufacturing equipment and the construction of semiconductor manufacturing facilities. It also includes incentives for manufacturers of specialized tooling equipment required in the manufacturing process.

The goal is to return to being number one in the world. This Advanced Manufacturing ITC will drive that forward.

This leads to the provisions in the Inflation Reduction Act of 2022 that a manufacturing company can take advantage of beyond this new 25% credit.

HOST: Many of us have realized over the past few years how many daily items depend on these chips, particularly with automobiles. Making sure we are a global leader is understood by all Americans.

You mentioned several different credits. Could you give a little more detail regarding the Section 45X Production Tax Credit (PTC)?

RON WRIGHT: Yes. Both pieces of tax legislation have a large impact on our manufacturing clients.

While many people assume the Inflation Reduction Act of 2022 was focused solely on clean energy, that is not the case.

In the Internal Revenue Code, we see Production Tax Credits (PTC) contained in Section 45 and Investment Tax Credits (ITC) contained in Section 48.

While Section 48D deals with investment credits, Section 45X is a new statute dealing with the Production Tax Credit.

Within the Inflation Reduction Act of 2022, the Section 45X Advanced Manufacturing Credit provides credits to manufacturers of eligible components produced and sold to an unrelated party after 2022.

These components are used in green energy, alternative energy, and other energy sectors. This includes solar and wind projects, as well as battery projects.

Examples include wind turbines, PV cells, PV wafers, inverters, solar grade polysilicon, polymeric backsheets, solar modules, torque tubes, and structural fasteners.

The Section 45X credit is available starting in 2023 and continues through 2032, making it a 10-year credit.

For example, a thin film photovoltaic cell is eligible for a credit of 4 cents per watt. A PV wafer is eligible for $12 per square meter.

Wind energy component manufacturing is eligible for a 10% credit, and torque tubes are eligible for 87 cents per kilogram.

As a manufacturer, the type of component you produce determines the credit amount you are entitled to receive.

HOST: Whenever we talk about credits, it results in tax savings, which is always positive. This leads nicely into the extension of the Advanced Energy Project Credit for manufacturers.

RON WRIGHT: The depth and breadth of available credits for manufacturers is very broad. Section 48C is the Advanced Energy Project Credit.

The Inflation Reduction Act revised and extended this credit. It is available to manufacturers for a wide range of renewable energy equipment and manufacturing facilities related to that production.

This is an allocated credit. The Inflation Reduction Act will allocate $10 billion of credits to facilities producing equipment for clean energy.

The base credit is 6%, but a manufacturer could earn a multiplier of five, resulting in a 30% bonus credit.

This bonus credit is available if prevailing wage and apprenticeship requirements are met. We have not seen full guidance yet and likely will not until next year.

Manufacturers should begin to plan immediately for both the Section 45X Production Tax Credit and the Section 48C Advanced Energy Project Credit.

These are complex areas, and as Matt said, these credits provide a dollar-for-dollar offset against tax liability. We will also discuss how to potentially monetize these credits.

HOST: Based on your assessment of the CHIPS Act and the Inflation Reduction Act of 2022, how do you see this positioning industrial manufacturing in the U.S.?

RON WRIGHT: I believe the industrial manufacturing industry is going to explode for a number of reasons related to the broad definitions in these acts.

Over the next five years, there will be close to $750 billion of capital available through investment tax credits, production tax credits, grants, and guaranteed loans.

The policy goal is to make the U.S. a world leader in manufacturing semiconductors and the components used in clean and alternative energy.

We are in a Renaissance period for our industrial clients. These two pieces of legislation work in tandem.

From 2022 through 2024, the acts extend and modify existing Section 45 and Section 48 credits. From 2025 through 2032, the Inflation Reduction Act establishes technology-neutral credits.

This includes the Clean Energy Production Credit and the Clean Energy Investment Tax Credit. There is a lot for manufacturers to take advantage of through 2032.

HOST: This series is voluminous. We originally planned four podcasts, but we now intend to have three trailing podcasts to cover more ground.

One of those will cover how to monetize these new energy credits. Ron, can you give a high-level preview of our fifth podcast regarding credit monetization?

RON WRIGHT: Absolutely. With upwards of $750 billion being placed into the industry, understanding how to monetize these credits is vital.

There are two key concepts from the Inflation Reduction Act: direct pay and transferability.

Under direct pay, a taxpayer can elect to receive a direct payment of the tax credit from the federal government for certain eligible credits.

Alternatively, a taxpayer can elect to transfer or sell all or any part of the tax credit to an unrelated taxpayer in exchange for cash.

This allows a company that cannot fully utilize a credit to sell it for capital. Transferability is broader than just Section 45 and Section 48.

Section 45X is actually a direct pay credit. We hope you will join us for podcast number five, as well as six and seven, as we identify these opportunities.

HOST: We have covered quite a bit today and have even more to discuss. I want to thank our listeners.

A key takeaway is that the CHIPS Act and the Inflation Reduction Act of 2022 are poised to position the U.S. as a global leader in semiconductor manufacturing and the industrial sector.

Our next podcast, number five, will be a deeper dive into monetizing energy credits. Podcast six will cover the Section 45Q credit for carbon oxide sequestration.

The seventh in the series will cover technology-neutral credits. We hope you listen to the previous episodes and the upcoming ones on the Cherry Bekaert website.

Thank you for your time, and thank you, Ron.

RON WRIGHT: Thank you, Matt. I look forward to the upcoming episodes. There is a lot of energy around these incentives that our industrial clients can take advantage of.

HOST: Thank you all. We stand by to help and look forward to having you join us for the rest of the series. Have a great day.