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

Welcome to Cherry Bekaert's Industrial Manufacturing Podcast. We're excited to continue our latest series titled Building a Competitive Recovery, where we will discuss the challenges of this COVID recovery landscape and provide strategies to position your company for future success.

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: To returning listeners, thank you for tuning back in to this series and our other podcasts. To new listeners, we appreciate you joining us at Cherry Bekaert.

HOST: MATT BRADY: We want to do more than core audit, tax, and compliance; we want to provide proactive advice and topics like today around the CHIPS Act. The series we've been doing around the CHIPS Act is evidence of that.

HOST: MATT BRADY: For those who joined us previously, we've had three podcasts on the CHIPS Act so far. The first was an overview, the second covered one of the new credits, and another was around the funding.

HOST: MATT BRADY: Today, podcast number four in this series, we will talk through interactions between the CHIPS Act and the Inflation Reduction Act of 2022, a bit more on the new advanced manufacturing credit, Section 45X, and a few other topics.

HOST: MATT BRADY: Before we get too far, I'd be remiss if I didn't introduce our guest, Ron Wright. Ron is a partner in our Strategic Tax Advisory Group. You will recall his name from podcasts one, two, and three. Ron, welcome back.

GUEST: RON WRIGHT: Thank you, Matt. Good to be back, and thank you to our returning listeners as well as our new listeners today.

HOST: MATT BRADY: Ron, as we did in podcasts one through three, can you start with a short high-level overview on the CHIPS Act, then discuss your observations on the interaction between the CHIPS Act and the Inflation Reduction Act of 2022?

GUEST: RON WRIGHT: As Matt commented, our series has focused on 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, as part of the CHIPS and Science Act of 2022.

GUEST: RON WRIGHT: The CHIPS Act authorizes $52.7 billion and includes appropriations of $200 billion. Taken together, that is more than $250 billion focused on increasing domestic semiconductor production.

GUEST: RON WRIGHT: Post-August 9, we saw a second landmark piece of tax legislation: the Inflation Reduction Act of 2022, signed by the President on August 16, 2022. The IRA contains numerous provisions that impact and benefit the manufacturing industry.

HOST: MATT BRADY: One topic our listeners requested more detail on is the new advanced manufacturing credit. Can you expand on that?

GUEST: RON WRIGHT: Our podcasts on the advanced manufacturing credit dug into the expanded credit under Section 48D, the advanced manufacturing investment tax credit. The United States pioneered semiconductor technology but has become reliant on foreign producers.

GUEST: RON WRIGHT: While American companies still account for a significant share of industry revenues, U.S. production has dropped from 37 percent in 1990 to about 12 percent today. That decline is a national and economic security concern, and policy changes are aimed at reversing that trend.

GUEST: RON WRIGHT: The advanced manufacturing investment tax credit under Section 48D provides a 25 percent investment tax credit for investments made in semiconductor manufacturing. The credit covers 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 WRIGHT: The goal is to restore U.S. leadership in semiconductor manufacturing and retain high-skill, high-wage jobs in the United States.

HOST: MATT BRADY: We also discussed the interaction with the Inflation Reduction Act of 2022. What else should manufacturers know from the IRA beyond Section 48D?

GUEST: RON WRIGHT: The IRA broadened incentives beyond semiconductor-specific credits. Within the Internal Revenue Code, production tax credits are generally in Section 45 and investment tax credits are in Section 48. Section 48D is the advanced manufacturing investment tax credit, while Section 45X is a new production tax credit.

GUEST: RON WRIGHT: Section 45X provides production tax credits for manufacturers of eligible components that are produced and sold to an unrelated party after 2022. These credits target components used in green or clean energy systems and related projects.

GUEST: RON WRIGHT: Eligible components include items used in solar, wind, and battery projects: thin-film photovoltaic cells, PV wafers, wind turbine blades and nacelles, inverters, solar-grade polysilicon, polymeric back sheets, solar modules, torque tubes, and structural fasteners, among others.

GUEST: RON WRIGHT: The Section 45X credit is available for components sold beginning in 2023 and continues through components sold after 2032, making it effectively a 10-year credit. The credit amount varies by component. For example, thin-film photovoltaic cells may be eligible for four cents per watt, PV wafers may be eligible for $12 per square meter, certain wind components may qualify for a 10 percent credit, and torque tubes may be eligible for $0.87 per kilogram.

HOST: MATT BRADY: There are many credits in these laws. You mentioned an extension of the Advanced Energy Project Credit. Can you explain that?

GUEST: RON WRIGHT: The Advanced Energy Project Credit, Section 48C, is an investment tax credit for manufacturers of a wide range of renewable energy equipment. The IRA revised and extended Section 48C, allocating $10 billion of credits attributable to manufacturing facilities that produce equipment used in clean energy.

GUEST: RON WRIGHT: The base credit is 6 percent, and a manufacturer can earn up to a multiplier of five as a bonus credit. The bonus is tied to meeting prevailing wage and apprenticeship requirements established by the IRA.

GUEST: RON WRIGHT: Guidance on these provisions has not yet been issued and is unlikely until next year, so manufacturers should begin planning now for the Advanced Energy Project Credit and the interplay between Section 45X and Section 48C.

HOST: MATT BRADY: From your assessment, what are the CHIPS Act and the Inflation Reduction Act of 2022 doing for U.S. industrial manufacturing?

GUEST: RON WRIGHT: The industrial manufacturing industry is positioned for substantial growth. Broad definitional terms in the CHIPS Act and the IRA expand both investment and production tax credits across a wide range of manufacturing activities.

GUEST: RON WRIGHT: Over the next five years, we expect close to $750 billion of capital to be deployed into manufacturing through investment tax credits, production tax credits, grants, guaranteed loans, and other provisions in the CHIPS Act and the IRA.

GUEST: RON WRIGHT: The policy objectives are to reestablish U.S. leadership in semiconductor manufacturing and to lead in components for clean and alternative energy. This is a potential renaissance for industrial manufacturing.

GUEST: RON WRIGHT: From 2022 through 2024, the CHIPS Act and the IRA expand and modify Section 45 production tax credits and Section 48 investment tax credits. From 2025 through 2032, the IRA establishes technology-neutral production and investment tax credits, often referred to as the clean energy production credit and the clean energy investment tax credit, adding further complexity and opportunity.

HOST: MATT BRADY: Given the volume and complexity, we had planned four podcasts but now intend to add three trailing podcasts. One topic listeners want to explore is how to monetize these new energy credits. Can you preview that for podcast five?

GUEST: RON WRIGHT: There are two primary monetization provisions in the IRA, which we will cover in depth in podcast five. First, Direct Pay allows certain taxpayers to elect to receive direct payment of eligible tax credits from the federal government. Direct Pay applies to specific ITCs or PTCs as defined in the statute.

GUEST: RON WRIGHT: Second, there is Transferability, which allows a taxpayer to transfer all or part of a tax credit to an unrelated taxpayer in exchange for cash. Transferability provides a cash monetization route for taxpayers who cannot fully utilize credits.

GUEST: RON WRIGHT: Section 45X is a Direct Pay-eligible credit, so the advanced manufacturing production credit can be directly paid under certain circumstances. We will explore Direct Pay and Transferability in detail in podcast five.

HOST: MATT BRADY: Thank you, Ron. That is a helpful preview. We will do a deeper dive into monetization in podcast five and follow with podcast six on the Section 45Q Credit for carbon oxide sequestration and podcast seven on technology-neutral credits.

HOST: MATT BRADY: We appreciate our listeners. If you have not listened to podcasts one through three in this series, they can be found on cb.com. Those cover the CHIPS Act overview, funding mechanisms, and the new advanced manufacturing credit.

GUEST: RON WRIGHT: Thank you, Matt. We look forward to podcasts five, six, and seven. There is a lot of energy, pun intended, around the CHIPS Act and the Inflation Reduction Act credits and incentives that manufacturers and industrial clients can take advantage of.

HOST: MATT BRADY: Thank you all for your time. We look forward to having you join us for the trailing series.