Carrots, Sticks Abound in Inflation Reduction Act
By Angela Adolph, Esq., of Kean Miller LLP
For traditional manufacturers, the Inflation Reduction Act of 2022 (IRA) offers a mixed bag of carrots and sticks to support its green energy goals.
Signed by President Biden on Aug. 16, 2022, the bill includes numerous tax credits and other incentives promoting clean energy investment. One of the IRA’s stated purposes is to incentivize and revitalize domestic manufacturing, and many of its tax credits and incentives are focused on clean energy manufacturing.
The IRA directs some specific tax outcomes, like tax credits for manufacturing green components. Other outcomes may be consequential or indirect, like increased local tax revenues due to higher wages or an expanded property tax base.
First, the Carrots
One of the most significant benefits of the IRA is the expansion of the Advanced Energy Project Tax Credit. This provision credits up to 30 percent of the investment in property used in a “qualifying advanced energy project” that is certified by the Department of Energy, and that is placed in service within two years from certification.
The IRA expands the definition of a qualifying advanced energy project to include initiatives at manufacturing facilities that reduce their greenhouse gas emissions by at least 20 percent. Manufacturers can apply the tax credit to low-carbon industrial heat; carbon capture, transport, utilization and storage systems; and equipment for recycling, waste reduction and energy efficiency. This tax credit is funded at $10 billion for eligible projects.
Similarly, the IRA creates a new, $5.8 billion Advanced Industrial Facilities Deployment Program under the Department of Energy’s Office of Clean Energy Demonstrations to invest in projects aimed at reducing greenhouse gas emissions from energy-intensive industries. Such fields include chemical, paper and pulp, iron, steel and glass manufacturing.
Importantly, companies may use this funding to retrofit or upgrade existing facilities, and the program’s funds may be issued as grants, rebates or loans to eligible manufacturers. Funding selection will give priority to projects with the greatest greenhouse gas emissions reductions and greatest benefit to the largest number of people.
The IRA grants $3 billion to the Environmental Protection Agency to award rebates and grants to port authorities, other local governing bodies and private entities to acquire green equipment and develop climate action plans. The heavy-duty vehicles and equipment used to load and unload cargo often make ports into air quality hot spots. The IRA sets aside $750 million for ports located in non-attainment areas, meaning those with severe air pollution.
The IRA also provides $2 billion to the Department of Energy for Domestic Manufacturing Conversion Grants. Selected applicants can use the grants to retool or retrofit existing automotive facilities for domestic manufacturing of green vehicles such as hybrid, electric, and hydrogen-fueled automobiles.
Finally, the IRA increases the Carbon Capture and Sequestration Tax Credit amount for industrial facilities and decreases the minimum plant size threshold for eligibility. The tax credit, described in Section 45Q of the Internal Revenue Code, incentivizes investment in systems that trap and store carbon emissions, such as in underground geological formations.
Now for the Sticks
One of the most significant drawbacks in the IRA is the enactment of a corporate minimum book tax. The minimum tax would be 15 percent of book income, which is the amount of income shown on the applicable corporation’s financial statements. Book income is reduced by any corporate alternative minimum foreign tax credit and can be adjusted for certain depreciation.
As a condition for being subject to the corporate minimum book tax for a tax year, the applicable corporation must have average book income in excess of $1 billion over three years prior to the tax year. A lower threshold of $100 million applies for a foreign patented multinational group.
The tax applies to a corporation that must be aggregated with other trades or businesses that are component members of a commonly controlled group, whether or not incorporated. Only the corporate partner’s distribution share of the partnership’s financial statement income is included. The aggregation standard includes, but is broader than, that required for filing consolidated returns. Also, a predecessor corporation is required to be aggregated.
It is important to note that the final version of the IRA retains a provision allowing for 100 percent bonus depreciation, which allows companies to fully and immediately deduct the cost of capital purchases from their book incomes.
Without the bonus depreciation, capital-intensive companies like manufacturers would report higher incomes and therefore likely incur higher taxes. Unfortunately, this bonus depreciation provision will be phased out between 2023 and 2026.
Another stick imposed by the IRA is an excise tax on the repurchase of shares by a corporation. Public companies with excess cash frequently use these stock buybacks to reduce the number of shares outstanding in order to increase earnings per share, which in turn affects the stock price. The excise tax is imposed at the rate of 1 percent of the amount of the buyback.
Finally, the IRA establishes a maximum annual methane waste emission rate for facilities and imposes escalating penalties for exceeding the limit.
Local Tax Implication
Manufacturers must also consider an unforeseen consequence of all this green investment: the potential for increased local property taxes.
Fortunately, most states already provide some economic development incentives for new or expanding manufacturing facilities, either in the form of property tax exemptions or income tax credits. Most states also provide a specific property tax exemption for pollution control equipment.
Manufacturing site selection is extremely competitive, and corporate tax rates, state and local incentives — as well as tax exemptions — are always among the Top 10 site selection factors identified by manufacturers. No doubt the states with these sorts of incentives will fare better in recruiting new green manufacturers and encouraging traditional manufacturers to implement greener technologies.
The IRA’s clean energy goals are clear, and it does an admirable job of incentivizing and encouraging green manufacturing. But for traditional manufacturers, it remains to be seen whether the IRA’s carrots — or sticks — will have the greater impact.
— Angela Adolph is a partner in the Baton Rouge office of the law firm Kean Miller LLP, the Louisiana member of American Property Tax Counsel, the national affiliation of property tax attorneys. Contact her at [email protected]