Year-End Tax Update for Manufacturers
Much has changed in 2022 on both the federal and state tax fronts. From new inflation-mitigation legislation to income tax changes, there are a plethora of opportunities for manufacturers to consider – and potential pitfalls to avoid – as they enter 2023.
Federal Tax Update
After the flurry of tax law changes in 2020 and 2021, the legislative process slowed in 2022, but only slightly. Congress could not pass the dramatic and far-reaching tax reform proposals initially put forth by the Biden administration. Thus, new tax legislation for 2022 has been limited to provisions in the CHIPS for America Act, signed by President Biden on Aug. 9, 2022, and the Inflation Reduction Act, signed by President Biden on Aug. 16, 2022.
CHIPS is primarily a government funding bill that aims to spur investments in semiconductor manufacturing capacity within the United States. However, CHIPS did create the Advanced Manufacturing Investment Credit, an important new tax credit for manufacturing companies operating in the semiconductor space. The credit is 25% of the qualified investment placed in service after 2022 and before the end of 2026. The qualified investment must be made with respect to a facility whose primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment.
Inflation Reduction Act
The tax provisions in the Inflation Reduction Act are numerous, but each provision is rather limited in scope, and most taxpayers will not be significantly affected by them. Nonetheless, it’s important to take note of the opportunities that exist.
The Inflation Reduction Act provides a plethora of tax benefits available to manufacturing companies involved with green energy production or in pursuing the construction of energy efficient buildings. Many of these energy provisions are simply extensions or expansions of existing tax incentives, but the Act did create a few new incentives, including the Advanced Manufacturing Production Credit. Energy provisions include:
- Advanced manufacturing production credit (applies to production of certain solar energy components, wind energy components, inverters, battery components and applicable critical minerals that are produced within the United States).
- Extension and modification of the renewable electricity production tax credit
- Extension and modification of the energy investment tax credit
- Increase in energy credit for solar and wind facilities placed in service in connection with low-income communities
- Extension and modification of carbon oxide sequestration credit
- Zero-emission nuclear power production credit
- Extension of tax credits for biodiesel, renewable diesel, and alternative fuels
- Extension of second-generation biofuel credit
- Sustainable aviation fuel credit
- Credit for production of clean hydrogen
- Extension and modification of nonbusiness energy property credit
- Extension and modification of residential energy efficient property credit
- Modification of energy efficient commercial buildings deduction
- Extension, increase, and modification of new energy efficient home credit
- Modification and termination of new qualified plug-in electric drive motor vehicle credit
- Credit for previously owned clean vehicles
- Credit for qualified commercial clean vehicles
- Extension and modification of alternative fuel vehicle refueling property credit
- Extension of the advanced energy project credit
- Reinstatement of superfund hazardous substance financing rate
- Clean electricity production credit
- Clean electricity investment credit
- Cost recovery for qualified facilities, qualified property, and energy storage technology
- Clean fuel production credit
The general business tax provisions in the Inflation Reduction Act are limited in scope. The new 15% corporate alternative minimum tax only applies to C corporations with average book net income greater than $1 billion (or $100 million for members of foreign-owned international reporting groups). And the new 1% excise tax on corporate stock buybacks only applies to publicly traded U.S. C corporations. However, most attention has been given to additional IRS funding, with many believing the funding will add tens of thousands new IRS auditors to pursue additional enforcement efforts. While it’s true some portion of the additional funding will be used to hire IRS auditors, the funding will be used for a wide variety of purposes such as improving taxpayer services, modernizing internal technology, and hiring additional IRS employees for all roles within the agency.
Research and Development Expenditures: A Word of Caution
The 2017 tax reform legislation known as the Tax Cuts and Jobs Act (TCJA) changed the deductibility of research and development (R&D) expenditures effective for 2022. These research-type expenditures now must be capitalized and amortized over five years (15 years if foreign) rather than immediately deducted. This change has the potential to be very broad and impact many manufacturing companies, including companies that haven’t historically tracked these types of expenditures. Learn more about the implications of this change.
State Tax Update
While individual state tax climates vary greatly, one historic constant for manufacturers that ship goods across state lines has been federal protection from state income tax. But new guidance released by the Multistate Tax Commission (MTC) suggests this is about to change.
In 1959, Congress enacted Public Law 86-272 in order to limit states from imposing an income tax on out-of-state businesses if its activities in the state were limited to the solicitation of sales of tangible personal property. In 1967, the states banded together to create the MTC. The Commission was designed to help protect the states’ taxing authority within the confines of the U.S. Constitution and create uniform tax policy.
In August 2021, the MTC approved a revision to its Statement of Information concerning the application of Public Law 86-272 to activities conducted via the Internet. The guidance lists eight examples of Internet activities that are not protected by P.L. 86-272:
- Providing post-sales assistance through an electronic chat or email that customers access through the company’s website
- Soliciting or receiving online credit card applications
- Inviting and or accepting applications for employment through a web-based platform
- Placing Internet cookies on computers of customers that are designed to gather market or product research
- Transmitting code or electronic instructions via the Internet to fix or upgrade products
- Offering or selling extended warranty services over the Internet
- Contracting with a marketplace facilitator to house products or inventory or to fulfill orders
- Contracting with in-state customers to stream videos and music to electronic devices
These policies are a significant departure from historical protections afforded to activities which were considered ancillary to solicitation of sales. While not binding on taxpayers as currently proposed, there have been two states already – California and New York – that have taken steps to adopt the MTC language.
This more limited interpretation of the protections afforded by P.L. 86-272 may drastically change the tax footprint of a manufacturer selling goods in multiple states. The change would impact C Corporations and flow-through entities alike. If more states join California and New York in adopting the MTC language, then remote sellers may never be taxed the same way again.
For assistance determining how these changes can help or hinder your operations, please reach out to your KSM advisor or complete this form.
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