MGO CPA | Tax, Audit, and Consulting Services

Topic: Tax Credit

You’ve Pre-Filed for the Energy Tax Credit, Now What?

Key Takeaways:

  • Navigate the crucial “now what?” phase after pre-filing by focusing on cost allocation, credit computation, and timely return filing by November 15.
  • Tackle complexities like multiple credits, thorough documentation, and tight timelines to maximize your clean energy tax benefits.
  • Leverage professional guidance to optimize your credits and potentially secure substantial refunds for reinvestment in your community.

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You’ve taken the first step towards benefiting from clean energy tax credits by completing your pre-filing registration. But what comes next? For state or local government entities, navigating the world of energy tax credits can be complex. Let’s break down the crucial next steps to help you maximize your benefits and meet the necessary deadlines.

Understanding the Timeline

After pre-filing registration, you’re now in the “now what?” phase. This critical period involves two main steps:

  1. Cost allocation and credit computation, and
  2. Filing of the return (due November 15).

It’s essential to maintain momentum during this phase to receive the full benefits of the tax credit.

Cost Allocation and Credit Computation: Key Considerations

As you prepare to file your return, keep these important factors in mind:

Multiple Credits and Projects

If your entity is filing for more than one credit or managing multiple projects, the process becomes more intricate. Each credit may require separate forms and documentation, and careful management is needed to avoid errors that could delay your refund.

Documentation and Support

Given that this is a relatively new process for many governmental entities, thorough documentation is essential. From initial project costs to ongoing expenses, every financial detail must be meticulously recorded. Proper documentation not only supports your credit claims but also protects your entity in the event of an audit.

Timeline Considerations

The timeline for filing is tight. After prefiling registration, you have a few months to complete cost allocation, credit computation, and the final tax return. Missing the November 15 deadline could result in forfeiting your refund for the year. Working with knowledgeable tax professionals can help you streamline this process and meet all necessary deadlines.

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How Professional Guidance Can Help Your Government

Given the complexities involved, your government may benefit from tax credits and incentives professionals to help you navigate the intricacies of:

  • Proper assessment of eligible expenses
  • Gathering and organizing necessary documentation
  • Verifying compliance with all IRS requirements
  • Maximizing your potential benefits

Filing the Return: The Final Step

Once your cost allocations and credit computations are complete, you’ll move on to filing your tax return. For 2023 tax filings, this return is due by November 15, 2024. Meeting this deadline is crucial to secure your refund.

A few key notes on filing your return:

  • Your filing must include the registration number(s) provided after your pre-filing registration review.
  • This is where you will make the formal election for elective pay (also referred to as “direct pay”).
  • Complete and accurate filing will help you receive the full value of your eligible credits.

What If You Missed the Pre-Filing Registration?

If you haven’t completed your pre-filing registration yet, it’s crucial to act quickly. While the IRS recommended a July 15 deadline, it’s not a hard cutoff. However, delays from a late pre-filing could impact your ability to meet the November 15 filing deadline. Contact a professional as soon as possible to avoid missing out on potential opportunities.

Elective Pay: A Quick Refresher

Elective pay allows governmental entities to benefit from certain clean energy tax credits. The amount of the credit is treated as a payment of tax, and any overpayment results in a refund. This means you can receive the full value of your investment tax credit even if you don’t owe other federal income taxes.

For example, a Northern California city recently computed over $6 million in credits for a $28 million clean energy project. This city stands to receive a substantial refund, which can be reinvested in further sustainable initiatives or other community needs.

Unlock the Full Potential of Your Energy Tax Credits

By staying informed and proactive, you can navigate this process successfully and maximize the benefits of clean energy investments for your community. As you move forward, remember that you don’t have to go it alone — engaging with a tax credits and incentives professional can help you optimize your credits and create a smooth process from start to finish.

How MGO Can Help

Need assistance with your cost allocation and credit computation to meet the filing deadline, or just want to learn more about what energy incentives could be applicable for your entity? Visit our Renewable Energy Investments and Credits page or reach out to our Tax Credits and Incentives team today.

Are Your Employee Retention Credit (ERC) Claims at Risk? What You Need to Know

Key Takeaways:

  • Employers should promptly respond to IRS notices regarding ERC claims to avoid disallowance and potential legal action.
  • Accurate documentation is essential, particularly regarding qualifying government orders and the eligibility period for ERC claims.
  • Understanding IRS-identified risks, such as overstating claims and calculation errors, is crucial to avoid costly compliance issues.

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UPDATE (AUGUST 2024):

The IRS is advancing its processing of Employee Retention Credit (ERC) claims while extending the moratorium on new claims to January 31, 2024. The IRS will now start processing claims filed between September 14, 2023, and January 31, 2024. This shift allows the IRS to expedite payments for legitimate claims and crack down on improper filings. What this means is that taxpayers who filed ERC claims after the prior moratorium date of September 14, 2023, and have been waiting for them to be processed, should now see progress on these claims in the coming months. This is a very positive development for taxpayers who have submitted pending claims.

Recently, 28,000 disallowance letters were sent, potentially saving $5 billion in erroneous payouts. The agency’s actions reflect a careful balance between protecting taxpayers and ensuring eligible businesses receive due funds. The IRS also recently reported that it has identified 50,000 valid ERC claims and is quickly processing them and sending refunds in the weeks ahead.

For those taxpayers who have received denial letters or believe their claims were wrongly rejected, there are several paths to address these issues. Consulting with a tax controversy advisor is advisable to determine the best course of action, including the possibility of appealing the decision. In some cases, taxpayers may consider pursuing legal action through tax court, U.S. District Court, or the Court of Federal Claims, either as an alternative to an appeal or following an unsuccessful one. Engaging an attorney early in the process is recommended to explore all available options.

To combat a wave of frivolous Employee Retention Credit (ERC) claims, the IRS has sharply increased compliance action through audits and criminal investigations, with more activity planned in the future. In this heightened enforcement-focused environment, employers are advised to act swiftly when responding to IRS notices regarding ERC claims.

Immediate Action Required for Employers Receiving IRS Audit Notifications

Employers must be aware that failing to respond to IRS notices within the time frame specified can lead the IRS to disallow the entire ERC claim and issue a notice of disallowance. Once the IRS formally disallows a refund claim, the taxpayer may be permitted to first file a protest with the IRS Office of Appeals or, in some cases, the taxpayer may decide to file a lawsuit in federal court to litigate the issue. Both scenarios subject employers to the necessary defense of an often burdensome and costly refund claim controversy, further delaying the much-needed ERC relief promised by Congress.

The successful defense of any ERC examination will depend greatly on an understanding of the risks and eligibility criteria to avoid the costly repercussions of noncompliance, including the potential for general examination. In Notice IR-2024-39, the IRS highlighted warnings signs that ERC claims may be incorrect, urging businesses to revisit their eligibility.

Key Examination Risks Identified by the IRS

  1. Claiming Too Many Quarters: It is unusual for employers to qualify for the ERC in all available quarters. A meticulous review of eligibility for each quarter is advised to avoid overstating claims.
  1. Non-Qualifying Government Orders: The IRS has clarified that not all government orders related to COVID-19 qualify for the ERC. Orders must have directly affected the employer’s operations, and mere guidance or recommendations do not suffice. Businesses must be able to document and substantiate the impact of qualifying government orders.
  1. Employee Counts and Calculation Errors: Thanks to changes in the law throughout 2020 and 2021, employers must now be vigilant in their calculations, adhering to the dollar limits and credit amounts for qualified wages.
  1. Supply Chain Disruptions: Qualifying for the ERC based solely on supply chain issues is rare. Employers must demonstrate that their supplier was affected by a qualifying government order.
  1. Overstating the Eligibility Period: Claiming the ERC for an entire calendar quarter is possible only if the business was impacted for the full duration of the quarter. Employers are entitled to claim ERC only for wages paid during the actual suspension period and must maintain accurate payroll records.

Navigating Refund Claim Controversies Amid Increased IRS Action

Employers should seek guidance from trusted tax professionals to maintain compliance and effectively manage the challenges of the IRS’s ongoing enforcement actions.

How MGO Can Help

MGO can assist you in navigating IRS audits and ERC claims — helping you meet compliance standards, provide accurate documentation, and address tax controversies. For detailed assistance, visit our Tax Advocacy and Resolution services.

Case Study: How MGO Helped an ISO-Certified Manufacturer Maximize the R&D Credit

Background:

Since Congress created the Research and Development (R&D) credit in the 1980s, it has been an essential tax strategy for companies investing in innovation — providing much-needed support to offset R&D expenses.

Prior to 2022, companies could deduct these expenses in the year paid or elect to amortize them over 60 months. However, a provision included in the Tax Cuts and Jobs Act of 2017 — that didn’t take effect until January 2022 — required businesses to capitalize and amortize these expenses.

This change has been devastating for businesses that invest heavily in innovation. No longer able to write off these expenses immediately, many organizations struggle to maintain cash flow. In some cases, it even threatens business continuity.

While congressional efforts are underway to reverse the requirement to amortize research and experimental expenses, businesses can claim the R&D tax credit to generate tax savings in the meantime.

Challenge:

An International Organization for Standardization (ISO) certified manufacturing company specializes in machining high-tolerance plastics and metals using computer numerical control (CNC) technology. With 96 employees and an annual revenue of $11 million, the company invests heavily in R&D and has incurred roughly $1 million in qualified research expenses.

This manufacturing company had a unique opportunity to claim the R&D tax credit because companies can claim the credit on costs related to implementing ISO to improve processes and quality in their businesses.

Approach:

MGO leveraged its extensive knowledge of R&D tax credits to thoroughly analyze the company’s R&D activities — including implementing continuous improvement and process improvements to streamline quality controls.

By accurately documenting all qualifying expenses and ensuring they align with the four-part test, MGO was able to help the client maximize their R&D credit benefit.

Value to Client:

With MGO’s help, this company successfully claimed the R&D credit — resulting in a net credit benefit of $90,000 in a single year, including federal and state tax credits.

This strengthened the company’s market position by enabling it to reinvest in research, maintain its ISO certification, and improve its ability to fund further innovation, contributing to its long-term competitiveness in the industry.

Your Trusted R&D Tax Credit Advisor

MGO’s tax professionals have more than 30 years of experience helping you document, file, and defend tax credit claims.

Contact MGO today for a complimentary R&D tax credit eligibility analysis to determine if this tax incentive can help fuel innovation and growth in your organization.

Case Study: How MGO Helped a Startup Manufacturer Maximize the R&D Credit

Background:

Since the 1980s, the Research and Development (R&D) credit has offered companies a financial incentive to invest in innovation. Once limited to those passing a stringent discovery test, the credit has expanded to include a broader spectrum of businesses, thanks to the more inclusive four-part test.

This shift provides companies investing in innovation a critical opportunity to reduce their tax burden and support cash flow. However, recent legislation has changed how businesses deduct research and experimentation (R&E) expenses.

Before 2022, companies could deduct R&E expenses in the year paid or amortize them over 60 months. However, legislation passed in 2017 that didn’t go into effect until 2022 mandates that companies must amortize R&E expenditures over 60 months rather than immediately deducting them.

This has been financially devastating to many companies. Due to this change, many can’t afford to pay their tax liabilities and some are even struggling to survive.

In this environment, it’s essential for companies investing in research and development to optimize the R&D credit.

The Challenge:

A startup company focused on developing autonomous driving mechanics faced a significant challenge due to the high costs of R&D. With total investments exceeding $700,000 and annual revenue of just $5,000, they were not yet profitable and, therefore, had no income tax liability to offset.

Despite this, the innovative spirit of the company necessitated substantial investment in R&D, which was not supported by immediate tax deductions per the new regulations.

Approach: 

MGO, with its deep understanding of tax regulations and R&D credits, stepped in to navigate the complex landscape of R&D incentives.

The solution leveraged the payroll tax offset, allowing the startup to apply R&D tax credits against their payroll tax liability. Prior to the 2023 tax year, claims were limited to the $250,000. Starting from the 2023 tax year, these claims can be maximized even further.

The payroll tax offset provision, available to startups with less than $5 million in gross receipts and less than five years of operation, proved vital for this early-stage company.

This strategy was crucial for the company, given its high payroll expenses and lack of taxable income.

Value to Client:

Through the strategic application of the R&D credit, MGO secured a $150,000 benefit for the company, effectively reducing its payroll tax expenses.

Using the R&D credit to offset payroll taxes provided the much-needed liquidity to support ongoing innovation efforts, demonstrating the transformative power of R&D incentives for startups.

MGO’s knowledge and experience enabled this autonomous driving startup to fully utilize R&D tax credits despite having limited revenue. By applying the credit to payroll taxes, the company could sustain its innovation journey in a challenging economic landscape.

Your Trusted R&D Tax Credit Advisor

At MGO, our professionals bring more than 30 years of R&D tax experience to help you document, file, and defend your R&D tax credit claim.

Contact MGO today to discover how we can help you maximize R&D tax credits to support your growth and innovation journey. We welcome the opportunity to provide a complimentary R&D tax credit eligibility analysis to determine whether this valuable tax incentive can fuel your business’s investment in innovation and growth.

Case Study: How MGO Helped a Product Development Company Maximize the R&D Credit

Background: 

Since the 1980s, the Research and Development (R&D) credit has been providing businesses with incentives to innovate.

An essential component of qualifying for the R&D tax credit is incurring research and experimental (R&E) expenses.

Until recently, businesses were able to deduct these expenses in the year paid or make an election to amortize them over 60 months. However, a provision in the Tax Cuts and Jobs Act of 2017 changed how businesses deduct R&E expenditures.

Starting in 2022, businesses must capitalize and amortize these expenses over 60 months rather than immediately deducting them. This change has been financially devastating for companies investing in innovation.

Challenge:

A product development company focused on the nutrition and fitness markets faced significant expenses associated with developing innovative workout products and ingestible pre- and post-workout recovery supplements.

With an annual revenue of $122 million, the company made considerable investments in R&D — totaling $2 million to $4 million over the last several years.

Since the company could not deduct those expenses in the year they were incurred, it needed to recoup some of the costs to sustain its research initiatives.

 

Approach:

MGO brought its extensive tax experience to the table to help this product development company navigate the complexities of the R&D credit.  

We verified the company’s R&D activities aligned with the four-part test to qualify for the credit and all projects were rigorously documented with records directly linking them to the four-part criteria.

Value to Client:

Through careful evaluation and strategic planning, MGO helped the client secure a substantial net federal and state R&D credit benefit of $250,000 for a single tax year. The company used these credits to offset its federal and state tax burden. 

This demonstrates the significant impact that R&D credits can have on a company’s financial health. The $250,000 credit enabled the client to reinvest in its innovative product pipeline, maintain a competitive advantage, and continue developing groundbreaking nutrition and fitness products.

Your Trusted R&D Tax Credit Advisor

MGO’s tax professionals have more than 30 years of experience helping you document, file, and defend tax credit claims.

Contact MGO today to discover how we can help you maximize R&D tax credits to support your growth and innovation journey. Our team is ready to guide you through the complexities of tax incentives and deliver tailored solutions that fuel innovation and business growth.

Fueling Your Future: Harnessing R&D Tax Credits for Innovative Growth

Key Takeaways:

  • R&D tax credits incentivize innovation by reducing tax liability and providing cash flow for companies to reinvest in research.
  • Current legislation proposes delaying R&D cost amortization, advocating immediate expensing through 2025 to boost U.S. innovation.
  • To maximize R&D tax benefits, companies must strategically align projects with eligibility criteria, maintain documentation, choose the optimal claim path, and tailor strategies to industry-specific nuances.

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In the competitive global market, staying at the forefront of innovation is not just a goal but a necessity for businesses of all sizes. Noting this, the U.S. government established a pivotal incentive to reward and encourage investments in research and development (R&D). R&D tax credits serve as a cornerstone for companies pushing the boundaries of innovation and technological progress.

Empowering Innovation Through Tax Incentives

The beauty of R&D tax credits lies in their dual benefit structure. Not only do they reduce tax liability for your business, but they also enhance cash flow — allowing reinvestment back into your company’s innovation pipeline. This reinvestment is vital for continuous improvement and long-term success, particularly for startups dreaming big and established companies refining processes and products. R&D tax credits are not just a tax strategy; they are a fundamental part of your growth narrative.

Whether you are a fledgling tech startup aiming for the next big breakthrough or a seasoned manufacturer improving existing processes, R&D tax credits offer widespread applicability. They represent a commitment to supporting the growth and innovation journey of businesses across various sectors, from AI and green energy to biotech and manufacturing.

Legislative Efforts Amidst Challenges

The Tax Cuts and Jobs Act (TCJA) introduced in 2017 made significant changes to R&D tax incentives, shifting from immediate expensing of R&D costs to a more burdensome five-year amortization. However, in a move to rejuvenate the innovation landscape, the Tax Relief for American Families and Workers Act of 2024 has been proposed to delay this amortization, championing immediate expensing through 2025. This legislative initiative underscores the economic imperative for the U.S. to maintain its global leadership in innovation and technology.

While there is bipartisan support for the importance of R&D incentives, with key proposals awaiting Senate action, the legislative landscape is not without its challenges. The proposed Fiscal 2025 Budget by President Biden earmarks substantial investments in innovative sectors to complement the tax incentives. However, the legislative progress faces hurdles with ongoing debates over government funding, potentially delaying critical policy adjustments necessary for the R&D tax incentives to realize their full potential.

Strategizing to Maximize Your R&D Benefits

For your business to capitalize on these incentives, you must align with the stringent four-part test that stipulates qualifying R&D activities must be:

  1. Technological in nature
  1. Aimed at permitted purposes
  1. Directed towards the elimination of uncertainty
  1. Entail a process of experimentation

Maintaining rigorous documentation is essential, linking projects directly to these eligibility criteria. Choosing the right claim path — against income or payroll tax — can also determine the extent and immediacy of the benefit. Furthermore, industry-specific insights can guide your company on how to tailor your R&D strategies — acknowledging that some activities may qualify more readily based on your industry’s nature.

How We Can Help

MGO’s Tax Credits and Incentives team can help you turn tax expenses into positive cash flow. Reach out to our team today to find out how you can leverage R&D tax credits to grow your business.

Your Guide to Final Rules on Electric Vehicle Tax Credits

Key Takeaways:  

  • The final rules for the $7,500 electric vehicle (EV) tax credit, effective July 5, 2024, define eligibility for new and used EVs and allow credit transfer to dealers. 
  • Automakers must trace battery supply chains to meet U.S. content requirements, with a $3,750 credit for using qualified critical minerals. 
  • Critical minerals and battery parts from entities with ties to hostile foreign governments (e.g., China, Iran) are excluded from credit eligibility. 

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On May 3, 2024, the U.S. Treasury Department unveiled the final IRS regulations for the electric vehicle (EV) tax credit of up to $7,500 for new and previously owned EVs. These new requirements are intended to enhance aspects of the 2022 Inflation Reduction Act (also called the “climate law”) and incentivize automakers to supply battery components from companies with ties to countries with a U.S. free trade agreement. Unless otherwise noted, the new rules become effective on July 5, 2024. 

Navigating New EV Tax Credit Regulations 

The final regulations contain: 

  • Definitions and rules regarding taxpayer and vehicle eligibility for the credit for new and previously owned clean vehicles.  
  • Guidance for taxpayers who purchase qualifying vehicles and intend to transfer the amount of any vehicle credit to dealers that are entities eligible to receive advance payments of either credit.  
  • Guidance for dealers to become eligible entities to receive advance payments of previously owned clean vehicle credits or new clean vehicle credits.
  • Rules regarding recapture of the credits

The final rules depart from the proposed rules released on April 17, 2023 and December 4, 2023 in several key ways. They:

  1. Address the foreign entity of concern (FEOC or “excluded entity”) restriction by imposing a detailed tracing process for automakers to track the origin of all components in the battery supply chain to qualify for the credit’s domestic content requirements.
  1. Fulfill the critical minerals and battery components requirements by implementing a new critical minerals test.
  1. Provide guidance for taxpayers to transfer EV credits when their vehicles are purchased by dealers, and for dealers to obtain advance EV credits and to obtain recapture of those credits.

The tracing process is the most prominent feature of the new final rule. The “traced qualifying value test” requires automakers to conduct thorough supply chain tracing to quantify the amount of minerals in the battery that meet the U.S. domestic content requirements.

Critical minerals from excluded entities (see below) cannot be included in the calculation. Automakers that satisfy the new test will be eligible for a $3,750 “critical minerals” credit.

Meeting Critical Minerals Requirements

The new rules provide three ways to meet the “critical minerals” (as defined in Section 45X(c)(6) of the Internal Revenue Code) requirement and thus be eligible for the full credit.

Minerals in the EV battery must be:

  1. Extracted in the U.S. (or in any country with which the U.S. has a free trade agreement in effect), OR
  1. Processed in the U.S. (or in any country with which the U.S. has a free trade agreement in effect), OR
  1. Recycled in North America

In addition, to qualify for the credit, the domestic content of the battery must be equal to or greater than the applicable percentage (as certified by the qualified manufacturer) based on when the vehicle is placed in service:

  • Before January 1, 2024: 40%
  • 2024: 50%
  • 2025: 60%
  • 2026: 70%
  • After December 31, 2026: 80%

In applying the critical minerals test (and under which manufacturers can use the previously proposed 50% “roll up” as a transition rule until 2027), the new rule adopts without any major changes the controversial proposed provision prohibiting battery parts and critical minerals from excluded entities (defined as FEOCs) — which comprise businesses with known ties to foreign governments deemed hostile to U.S. interests (currently China, Iran, North Korea, and Russia). FEOCs are ineligible from qualifying for the credit. Many of these FEOCs have ties to China, which dominates the EV battery supply chain. The FEOC battery component rules took effect on January 1, 2024.

In connection with the FEOC restrictions, the regulations require that manufacturers use the allocation-based accounting rules for the critical minerals outlined in the proposed rules. The new rules also confirm that certain battery components (such as graphite contained in anode materials) are impractical to trace and permit manufacturers to continue excluding those materials in certifying that their products have met the due diligence requirements through 2027.

How MGO Can Help

MGO can support your business in understanding and complying with the new EV tax credit regulations. With deep knowledge in renewable energy investments and credits, MGO offers guidance on meeting eligibility requirements, tracing supply chains, and adhering to critical mineral standards.

Our team provides strategic insights to help you optimize tax benefits while complying with the latest IRS rules. Discover how we can assist your business in leveraging these new opportunities by visiting our Renewable Energy Investments and Credits page.

Treasury, IRS Release Final Regulations on Elective Pay Election for Energy Tax Credits 

The Department of the Treasury and the IRS on March 5 released final regulations (TD 9988) on the elective pay election for certain energy tax credits under IRC Section 6417, added by the Inflation Reduction Act (IRA), which treats the credits as a  payment against federal income tax liabilities.  

The final regulations adopt the proposed regulations (REG-101607-23) with some modifications that clarify which applicable entities are eligible to make an elective pay election and how the  election should be made.  

The IRS also updated the elective payment frequently asked questions based on the final regulations. Finally, the IRS issued Notice 2024-27, which requests additional comments on any situations in which an elective payment election could be made for a clean energy credit that was purchased in a transfer, a sequence of events referred to as chaining.

Background 

The IRA introduced, for tax years beginning after December 31, 2022, the ability for some entities to monetize applicable tax credits via an “elective pay” election under IRC Section 6417. This allows applicable entities to treat certain credits as payment against their federal income tax liabilities and to receive a refund of any excess payment.   

Eligible Credits and Entities 

The IRA specifies that only some credits and entities as eligible for the elective pay election under Section 6417. Applicable credits include:

  • Credit for Alternative Fuel Vehicle Refueling/Recharging Property (Section 30C)
  • Renewable Electricity Production Credit (Section 45)
  • Carbon Oxide Sequestration Credit (Section 45Q)
  • Zero-Emission Nuclear Power Production Credit (Section 45U)
  • Clean Hydrogen Production Credit (Section 45V)
  • Commercial Clean Vehicle Credit (Section 45W) – Tax exempt entities only
  • Advanced Manufacturing Production Credit (Section 45X)
  • Clean Electricity Production Credit (Section 45Y)
  • Energy Credit (Section 48)
  • Qualifying Advanced Energy Project Credit (Section 48C)
  • Clean Electricity Investment Credit (Section 48E)

Eligible entities, referred to as “applicable entities,” include:  

  • Tax-exempt organizations 
  • Any state, the District of Columbia, or political subdivision  
  • An Indian Tribal government or subdivision  
  • Any Alaska Native Corporation  
  • The Tennessee Valley Authority  
  • Rural electric cooperatives 
  • An agency or instrumentality of certain applicable entities

Partnerships

While the final regulations bring clarity to the issue of determining which entities are eligible to make an elective pay election, they notably exclude partnerships from making such an election (except with respect to Section 45V, 45Q, and 45X credits). This exclusion has significant implications for the renewable energy sector, where projects are commonly structured as partnership entities to pool capital, diversify risk, and combine the expertise of various entity partners.

During the comment period on the proposed regulations, several commenters advocated for the inclusion of mixed partnerships – that is, partnerships that consist of both applicable entity and non-applicable entity partners — as applicable entities to allow for an elective payment election equal to the applicable entity partner’s allocable credit. However, Treasury and the IRS rejected those suggestions and adopted the regulations as originally proposed.

However, the final regulations do allow entities to make a valid election out of Subchapter K as a means for these entities to make an elective pay election. Feedback from commenters highlights the complexities and burdensome requirements that arise from making such an election out of Subchapter K, limiting its usefulness. Treasury and the IRS acknowledged such challenges and simultaneously issued proposed regulations under Section 761 for renewable energy projects that validly elect out of Subchapter K. Under the proposed regulations, exceptions would allow certain unincorporated organizations to make an elective pay election.

Tax-Exempt Grants & Loans

The final regulations adopt special rules regarding qualified energy property acquired using certain tax-exempt grants and forgivable loans. The rules state that (1) tax-exempt amounts are includable in the basis of the property and (2) “no excess benefit” can be derived from the use of restricted tax-exempt amounts used towards acquiring investment-related credit property.

The addition of the “no excess benefit” rule effectively limits the amount of the applicable credit that can be claimed such that the sum of any restricted tax-exempt amount(s) and the applicable credit does not exceed the cost of the investment-related credit property. This rule applies only to tax-exempt amounts that are restricted for the specific use of purchasing, constructing, reconstructing, erecting, or acquiring the investment-related credit property. The final regulations include examples to illustrate this rule.

Making the Election

To participate in the elective pay election, all credits must undergo a prefiling registration process and the applicable entity must secure a valid registration number. Credits can be registered as early as the first day of the taxable year in which the qualified energy property is placed in service. Any election received by the IRS without a valid registration number will be deemed ineligible. As currently established, a “short form” renewal process for multiyear credits such as the production tax credit is not available. A new registration must be submitted each year a credit is generated.

Applicable entities that already file an annual tax return would continue to file that return with the appropriate tax credit form and Form 3800 completed. Applicable entities that do not file an annual information return with the IRS would utilize Form 990-T. Note that the elective pay election must be made on an originally filed return (including extensions) and cannot be made on an amended return.

The final regulations also confirm that fiscal year organizations that do not normally have tax filing requirements may adopt a tax year-end different from its current accounting year-end. Such organizations are required to maintain adequate books and records of any differences between its normal fiscal year-end books and adopted tax year-end books. This provides increased opportunity for organizations that placed qualified energy property in service early in 2023 and otherwise would have been excluded from a tax credit benefit.

Processing of Payments

Treasury and the IRS opted not to define a specific time frame for processing payment of an elective pay election, instead indicating in the preamble that the prefiling registration process is designed to verify certain limited information in advance and mitigate the risk of delayed payment processing by the IRS.

The final regulations additionally confirm that applicable entities that choose to make this election will receive payment in one lump sum as opposed to multiple payments. Some commenters had suggested an accelerated payment mechanism that would enable applicable entities to submit the election as early as the placed-in-service date of the qualified energy property, thus enabling the IRS to provide pre-payment of a portion of the applicable credit based on a review of the prefiling registration information. Given that the elective payment amount is treated as made when a credit claim or the annual tax return is filed, Treasury and the IRS concluded that it would not be possible to implement this mechanism. 

Written by Leah Turner, Aaron Wright and Gabe Rubio. Copyright © 2024 BDO USA, P.C. All rights reserved. www.bdo.com

Learn more about how your can government benefit from clean energy tax credits with elective pay.

How Your Company Can Claim the CHIPS Act Tax Credit

Key Takeaways: 

  • The CHIPS Act provides more than $50 billion to boost U.S. semiconductor manufacturing, including current funding opportunities for commercial fabrication facilities and advanced packaging research and development (R&D).
  • The Advanced Manufacturing Tax Credit (Section 48D) offers a 25% credit for qualified investments into semiconductor manufacturing facilities placed in service from 2023-2026.
  • Companies seeking CHIPS incentives or 48D credit should understand eligibility requirements, review application process details, and connect with specialized tax credits and incentives professionals to ensure maximum benefit.

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On August 9, 2022, President Joe Biden signed into law the Creating Helpful Incentives to Produce Semiconductors Act of 2022 (commonly referred to as the CHIPS Act). The legislation provides $52.7 billion to increase semiconductor research and development in the United States. The CHIPS Act also established the Advanced Manufacturing Tax Credit (Section 48D), available to entities that manufacture semiconductors.

Recently, the government awarded its first major CHIPS Act grant – providing $1.5 billion to GlobalFoundries, one of the world’s leading semiconductor manufacturers, to expand its semiconductor production in New York and Vermont. That grant is expected to be the first of several announcements in the coming months as the government ramps up CHIPS Act funding.

What is the Purpose of the CHIPS Act?

The intent of CHIPS is simple: the U.S. wants to incentivize domestic companies to manufacture semiconductors. The president called the CHIPS Act a “once-in-a-generation investment in America itself,” as the legislation aims to lower costs and create jobs in the production of these advanced chips.

The COVID-19 pandemic forced the semiconductor industry to operate at a reduced capacity, while lockdowns increased demand for products using semiconductors (computers, tablets, gaming systems, cars, etc.). This created a perfect storm, fueling a shortage of semiconductors. As a result, the U.S. recognized the need to increase its semiconductor output.

However, manufacturing semiconductors is not cheap and requires substantial investments. CHIPS, along with the available tax credit, encourages these investments.  

The CHIPS Act includes provisions for:

  • $39 billion in incentives to build, expand, or modernize domestic facilities and equipment for semiconductor manufacturing, assembly, testing, advanced packaging, or research and development
  • $13.2 billion in R&D and workforce development
  • $500 million for international information communications technology security and semiconductor supply chain activities

Understanding the Advanced Manufacturing Tax Credit

With the addition of Section 48D to the Internal Revenue Code, CHIPS offers a new tax credit if your company invests in advanced manufacturing facilities or facilities whose primary purpose is manufacturing semiconductors or semiconductor manufacturing equipment.

Eligible businesses can receive a 25% tax credit of “qualified investments”. You can elect to treat the credit as payment against tax (i.e., direct pay) if you do not have sufficient tax liability to utilize the credit, making this essentially a refundable tax credit.

Eligibility criteria for 48D

To be eligible for 48D, you must have made a qualified investment for any taxable year integral to an “advanced manufacturing facility” for semiconductors placed in service during that year. Qualified properties must be:

  • Buildings, structural components, or parts of a building (not including administrative services or other functions unrelated to manufacturing)
  • Crucial to the operation of the advanced manufacturing facility
  • Constructed or built by the taxpayer
  • Qualified for amortization or depreciation

Taxpayers that use facilities and equipment outside the U.S. will not be eligible (similar to other investment credit requirements). Other taxpayers ineligible for the credit include:

  • Foreign entities noted as “foreign entities of concern” (i.e., foreign terrorist organizations or organizations included on the Office of Foreign Assets Control list).
  • Taxpayers that have engaged in significant transactions involving the material expansion of semiconductor manufacturing capacity in China or another foreign country of concern.
  • If a taxpayer enters a transaction in a foreign country of concern within 10 years of claiming the credit, it will be recaptured. 

48D timing

The tax credit applies to any property placed in service after December 31, 2022, for which construction begins before January 1, 2027. It does not apply after December 31, 2026, nor can you use the tax credit for constructing a property after this date. If construction on a facility began before January 1, 2023, the credit applies only to the portion of the construction started after August 9, 2022. 

Application process  

In March 2023, the IRS issued proposed regulations addressing direct payment of Section 48D credit. The proposed regulations also require taxpayers to register through an IRS electronic portal before treating Section 48D as a direct payment on a tax return.   

The IRS will issue a registration number for each qualified investment for which your company is claiming a credit, and that number must be included on your tax return. 

CHIPS Incentive Opportunities

To access CHIPS incentives, your company must first apply for open funding opportunities. To date, the U.S. Department of Commerce has issued three Notice of Funding Opportunities (NOFOs) through the CHIPS for America program: 

  1. Commercial Fabrication Facilities – Currently accepting applicants  
  1. Small-Scale Supplier Projects – No longer accepting applicants, in second phase of process 
  1. National Advanced Packaging Manufacturing Program (NAPMP) Materials & Substrates – Just announced on February 28, 2024 

How to apply for open NOFOs 

Application forms and instructions are available on the CHIPS Incentives Program application portal. FAQs, guides, and templates can also be found in the “Resources” section of the portal. 

The application process includes the following stages: 

  • Statement of interest 
  • Pre-application (optional, but recommended) 
  • Full application 
  • Due diligence 
  • Award preparation and issuance 

Statement of interest – To submit a statement of interest, applicants need to register for an account on the CHIPS Incentives Portal. A statement of interest must be submitted at least 21 days prior to submitting a pre-application or full application. 

Pre-application – The optional pre-application provides an opportunity to ensure your projects are consistent with program requirements. During this stage, you will receive feedback on strengths and weaknesses of your proposal and recommendations for improvement. 

Full application – Both pre-applications and full applications are accepted on a rolling basis. 

Due diligence – Your application will undergo review to ensure alignment with evaluation criteria specified in the Notice of Funding Opportunity (NOFO), with the possibility of requests for additional information. 

Award preparation and issuance – Before receiving an award, you must have an active registration in the System for Award Management (SAM). It’s a good idea to begin the registration process for SAM.gov early as it may take anywhere from two weeks to six months (due to information verification requirements). Check out SAM.gov’s Entity Registration Checklist. 

Maximizing Your Semiconductor Manufacturing Tax Credits and Incentives

Navigating CHIPS’s nuances can be challenging – especially when claiming the available tax credit and determining how it is refundable. Furthermore, companies seeking to increase their semiconductor manufacturing capacity in the U.S. should also assess application and opportunity for federal and state R&D tax credits and incentives.   

With more than 30 years of experience, our dedicated Tax Credits and Incentives team can help you maximize your credit benefits, develop the appropriate documentation methodology, assist in calculating and claiming credits, and defend your claims. Our full-service firm, led by experienced CPAs and a

What to Expect from the Tax Relief for American Families and Workers Act

House Ways and Means Committee Chairman Jason Smith and Senate Finance Committee Chairman Ron Wyden announced agreement on a bipartisan tax framework to help families and main street businesses that is anticipated to be introduced as The Tax Relief for American Families and Workers Act of 2024. MGO will continue to monitor the development of the anticipated bill and proposals and provide related updates and information to our clients and network.

Here is a sneak peek into some of the expected goals of the tax framework: 

IRC §174 Treatment

  • Boost innovation and competitiveness by allowing U.S. R&D expenses to be deducted in the year incurred — in comparison to the current 174 mandatory capitalization over five years, that has been in effect since the 2022 tax year. This change is anticipated to be retroactive to the beginning of 2022 and go through 2025. This should create an opportunity to decrease taxable income on an amended 2022 income tax return. 
  • 174 capitalization would still be required for foreign expenditures over 15 years.

Business Tax Relief

  • Retroactive deferral until 2026 of the reduction in the 100% bonus depreciation deduction.
  • Removal of depreciation, amortization, and depletion deductions from the calculation of adjusted taxable income for the IRC 163(j) business interest expense limitation. This change is also anticipated to be retroactive to the beginning of 2022 and be effective through 2025. This may create an opportunity to decrease taxable income and/or increase tax attributes for the 2022 tax year through an amended 2022 income tax return.

IRC §179 Current Expense Deduction

  • Increase in the maximum amount to $1.29 million and the investment limitation cap to $3.22 million for property placed in service in 2024, with inflation adjustments for post-2023 tax years. 

Reporting Threshold Adjustments

  • Increase in the reporting threshold for filing Form 1099-NEC and 1099-MISC from $600 to $1,000, applicable to payments made after 2023, with inflation adjustments from 2024. 

U.S.–Taiwan Cross-Border Activities and Investments

  • The bill creates a new section 894A of the Internal Revenue Code (“IRC”), providing substantial benefits to Taiwan residents (“qualified residents of Taiwan”), similar to those that are provided in the 2016 United States Model Income Tax Convention (“U.S. Model Tax Treaty”). Since the legislation requires full reciprocal benefits, it does not come into full effect until Taiwan provides the same set of benefits to U.S. persons with income subject to tax in Taiwan, similar to the reciprocal operation of a tax treaty.

Child Tax Credit Enhancement

  • Increase in the maximum refundable Child Tax Credit from $1,600 to $1,800 in 2023, $1,900 in 2024, and $2,000 in 2025.
  • Revision of the refundable portion, calculated on a per-child basis.

Disaster Relief Provisions

  • Retroactive exclusion of qualified wildfire relief payments from gross income. 
  • Introduction of disaster-related personal casualty loss provisions and treatment of disaster relief payments for victims of the East Palestine, Ohio, train derailment.

Low-Income Housing Credit Enhancement

  • Enhancing the Low-Income Housing Tax Credit, by restoring the 12.5% LIHTC ceiling for taxable years beginning after December 31, 2022.

What should your business do in the meantime?

R&D/174 Proposed Changes – There likely is no immediate timeline sensitivity for the 174 capitalization requirement currently, unless you are a fiscal year filer or have an upcoming tax provision. In the event you have a return being filed in Q1, we recommend connecting with your tax credits service provider to discuss timeline for a formal analysis and processes. Please note that the anticipated changes are only to U.S. expenditures and therefore any foreign-based expenditures would still require capitalization over 15 years. A formal 174 analysis is recommended to support the research expenditures and to be able to apply the most favorable treatment of either immediately deducting or deferring, in the event of a bill passing and depending on whether the expense is a domestic or international expense.  

It is also recommended to assess how the modification of the research and experimentation expense treatment would affect an amended 2022 return and forecasts for the 2023 tax year, especially for businesses that had material domestic research and experimentation expenditures. If all research and experimentation expenditures in the 2022 tax year were foreign, there will be no related change.  

Other Business Tax Reliefs and Proposed Modifications – Please connect with your specialty tax service provider to discuss the timeline for your return filings and address forecasts and changes that may be created from these proposed changes. We have summarized a few recommendations and examples:  

International

  • All U.S. citizens and U.S. resident taxpayers with activities within Taiwan should review their activities in light of these provisions to determine if reduced withholding taxes or minimization of creating a taxable presence is possible. All Taiwan residents with activities in the U.S. should review U.S. activities for similar issues.

Private Client Services

  • Assess how the proposed enhancements of the Child Tax Credit and Assistance for Disaster-Impacted Communities affect your personal deductions and 2023 tax liability.

State and Local Taxation

  • Evaluate variances in state conformity for the various changes. While some states have rolling conformity and will match changes at the federal level, others have fixed conformity and will not necessarily adopt these changes without further legislation.

Corporate Taxation

  • Evaluate the need to file an amended return to “unwind” the 2022 Sec. 174 research and development amortization to deduct those costs in full for 2022. This could provide significant refund opportunities.  
  • Assess how the removal of depreciation, amortization, and depletion deductions from the calculation of adjusted taxable income for the IRC 163(j) business interest expense limitation affects taxable income and liability.  

It is essential to note that despite this bipartisan breakthrough, the absence of an actual bill and the uncertainties surrounding the enactment of these provisions in a divided Congress should remain critical considerations.  

Our perspective

As experienced advisors, MGO can help model the best position for you through the 2023 tax year and beyond — potentially saving you significant amounts of money. Our holistic tax advisor and business advisor-first philosophy factors into not only the direct effects of the current legislation (i.e., the proposed tax framework summarized in this article), but also the impact on other areas of your tax returns (e.g., international, transfer pricing, state and local tax) and what potential savings you can obtain by claiming credits and incentives. Please feel free to reach out to any of our MGO professionals below to get the experienced insight that you deserve.

Contact our leaders in the following areas for their specialty or to further address proposals in the tax framework discussed.