Specialty Tax Planning – February Update
By: Phil Williams, Partner, Tri-Merit
As a seasoned specialty tax firm, Tri-Merit closely monitors conversations in Washington as well as legislative items in debate and relevant cases making their way through the Federal Courts. As soon as anything is finalized, whether it be a Treasury Regulation, court case, or piece of legislation, we are sure to broadcast our position as quickly as we can so that adjustments can be made if necessary. When the landscape changes rapidly and without detail, this becomes more challenging, but we will do our best to summarize our take on “what our clients and CPA partners need to know”. Please understand that in this climate, there are both certainties as well as speculation, so portions of these updates are based on educated opinions.
Executive Orders related to Inflation Reduction Act Initiatives
On January 20, President Trump issued an executive order entitled “Unleashing American Energy”, the stated purpose of which was to shift energy priority from the previous administration’s focus on clean energy and greenhouse gas mitigation to one focused on energy exploration and production to maintain the United States’ position as a global energy leader.
I would guess that most people reading this have heard some of the talking points, including the elimination of the “EV Mandate”, safeguarding of freedoms to purchase certain consumer goods and appliances, and the termination of the “New Green Deal”. While, just like with pretty much any political item these days, there are strong opinions on both sides of this debate, we’ll keep the commentary to the practical application of the last example and what this might mean for taxpayers that have either taken advantage of the programs that were first introduced under the Inflation Reduction Act (IRA) of 2022 or were contemplating making investments in renewable energy projects in the coming years.
The relevant portion of the executive order reads like this:
- All agencies shall immediately pause the disbursement of funds appropriated:
- through the IRA of 2022
- through the Infrastructure and Jobs Act
Including but not limited to funds for EV charging stations made available through the National Electric Vehicle Infrastructure Formula Program (NEVI)
- All agencies shall review processes, policies, and programs for issuing grants, loans, contracts, or any other financial disbursements of such appropriated funds for consistency with the law and policy in this EO
- All agency heads shall submit a report to the Directors of the NEC and OMB within 90 days of this EO detailing the results of the review conducted per this provision
- No funds identified in this review shall be disbursed by a given agency until the Director of OMB and Assistant to the President for Economic Policy have determined such disbursement is consistent with their review recommendations
With significant investments made throughout 2023 and 2024 with the potential for tax credits in mind, this language was disconcerting for those either anticipating a refund or were midstream on projects. To put this in perspective, the affected parties could be as small as a not-for-profit (NFP) taxpayer like a church or private school that installed a $500,000 solar or geothermal system and was anticipating a $150,000 elective pay credit or as large as a utility scale development with greater than $1 Billion in costs, with hundreds of millions of dollars in potential tax credits in limbo and hundreds of jobs at stake. The unique attributes of elective pay (Section 6417) and transferable (Section 6418) credits required a deeper look into the specific verbiage of the EO. At the end of the day, our interpretation yields some good news.
Tri-Merit’s position is The Inflation Reduction Act (IRA) tax credits are statutory incentives rather than direct appropriations or discretionary funding and should remain unaffected by the EO and its disbursement freeze. We remain optimistic that in the coming months, there will be greater clarity on any potential changes to energy-related incentives.
With all of this being said, the current administrative transition could lead to delays in processing. We recommend filing your claims without delay to ensure your credit claims are prioritized and avoid unnecessary setbacks. If you have questions about how this may impact your projects or need assistance navigating the process, we’re here to help.
Section 174 Capitalization/Bonus Depreciation
While both of these items are being closely watched, neither has seen any progress in formal legislation, which is expected with Congress’ stated intention to release an overarching tax package addressing expiring TCJA provisions later this Spring. The good news is that both were addressed during the confirmation hearing of Scott Bessent, who the Senate confirmed as Secretary of the Treasury on January 27 by a 68-29 vote.
While adjustments to either of these items will require legislative action, the Secretary’s opinion does carry weight, so it was refreshing to see the following exchanges.
Related to Section 174 (Research and Experimentation) expensing, Senator Maggie Hassan (D – New Hampshire) raised issues of American competitiveness with China providing companies a 200% “Super Deduction” while American companies are limited to a 10% deduction in year one. In response, Mr. Bessent stated that he wasn’t fully versed on the matter, but he was inclined to support a less draconian approach, making American businesses more competitive on the world stage.
On bonus depreciation, Senator James Lankford (R – Oklahoma) questioned Mr. Bessent regarding his opinion on providing a more stable landscape for bonus depreciation. To be clear, Senator Lankford did stop short of advocating a permanent extension of 100% bonus depreciation (even though this would be essential for growth), but emphasized a more stable approach than the current benefit, which is declining by 20% per year from 2023 through 2026 until it is eliminated. In response to this, Mr. Bessent stated, “So I think that increasing the after-tax return on capital for US companies, especially small business is one of the greatest forms of job creation that we could see.”
These are just comments and should be treated as such, but in a time of uncertainty, it is refreshing to at least affirm the approach that many taxpayers in the manufacturing and software industries hoped this administration would take.
Tri-Merit will continue to keep a close eye on events in Washington and will put out updates as they become available.
