Murphy: To receive the credits and/or incentives outlined in the IRA such as the Advanced Manufacturing Tax Credit (45X) or the Advanced Energy Project Investment Tax Credit (48C), manufacturing companies must meet certain criteria. For 45X, eligible outputs or “components” are organized into five buckets: inverters, solar energy, wind energy, qualifying battery and applicable critical minerals. As a manufacturer, if output falls into one of those categories, then the taxpayer is generally qualified for the credit. Guidance recently stated that the amount of credit received is entirely dependent on the component produced; the origin of subcomponents and other inputs does not impact a taxpayer’s ability to claim the credit for U.S.-based manufacturing of eligible components (i.e., 45X does not have a domestic content rule). For 48C, during the first round of funding, manufacturers had to apply for each of their individual facilities, ensure the eligible property had not yet been placed in service, and “submit an application narrative, an application workforce and community engagement plan, a business entity certification, an application data sheet and appendix files.” When the second round of funding opens in 2024, manufacturers who did not apply in the first round should look to follow the same instructions. It’s worth noting that after an allocation is received, taxpayers have a four-year window in which to place the project in service.
AD: Among the federal agencies through which IRA funds will flow are the departments of the Treasury as well as Agriculture, Energy, and the EPA, the latter three receiving $120 billion combined to promote renewable, clean energy and accelerate key U.S. sustainability goals. How does this tie in with manufacturers’ ESG goals?
Murphy: In addition to reducing carbon emissions (“E”) in the U.S., the IRA has a number of critical and socially (“S”) focused objectives including elevating wages, retraining people, developing careers, restoring impacted communities, and bringing critical manufacturing back to the U.S. Having the IRA’s funds flow through these federal agencies also promotes and facilitates the establishment of stricter, and necessary, environmental regulations and standards (“G”). By concentrating funds and incentives on a sustainability and carbon reduction agenda, energy and related manufacturing companies pursuing these incentives will directly advance federal policy objectives while also elevating and accelerating their own ESG-related goals and objectives.
AD: Why is collaboration between a company’s tax and finance departments and those charged with meeting its ESG goals important?
Considering the amount of data gathering needed to comply with the IRA, tax departments should look to work closely with the relevant divisions within their organization to ensure goal alignment. A key opportunity is to ensure that data gathered is being utilized to not only comply with the IRA, but to provide shareholders and investors with the necessary information to measure and track company progress related to ESG or related sustainability objectives. With tax playing such a centralized role in communications between the critical departments (HR, finance, procurement, legal, accounting, etc.), tight coordination will likely streamline the effort to confirm ESG goals are being met while also remaining compliant from a reporting standpoint.
AD: What reporting mechanisms will companies need to put in place to show that they are in compliance with sustainability and other goals they have set?
Murphy: As reporting requirements evolve, so should the company’s data collection. Information gathering is important, but companies often don’t have streamlined processes in place to handle the true scope of their reporting needs. Collecting and analyzing data for reporting can be complex, and more and more companies are requiring in-depth process reviews to ensure compliance. By proactively addressing these challenges and investing in the right technology solutions, companies can maintain accurate, efficient, and timely reporting. In 2024, companies must consider reporting requirements linked to the SEC’s proposed carbon and ESG reporting, as well as ensuring that tax benefits are being realized and properly reflected in business plans when working with vendors, contractors, and regulators.
AD: Is there anything else you’d like to add?
Murphy: The convergence of tax policy and ESG related requirements in the U.S. creates a unique opportunity for companies to develop their data collection processes in a manner that will satisfy and promote multiple objectives. Tax departments need to have a seat at a company’s ESG table, and by embracing the transformative power of total tax contribution reporting, companies can strive toward a more transparent, inclusive, and responsible global business environment.
To read Brian Murphy’s full article on which this Q&A is based, click here.