On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (IRA). With many provisions derived from the previously proposed but not passed Build Back Better Act, the law introduces, modifies, extends, and bolsters numerous clean energy tax incentives available to both business and nonbusiness taxpayers.
Specifically, there are 15 clean energy provisions you should be cognizant of if you hope to benefit from the available opportunities of the new law.
1. More Focus on Labor and Domestic Sourcing Initiatives
The IRA targets independent clean energy development by focusing on labor development and domestic sourcing.
In terms of developing a strong labor pool, the IRA offers incentive multipliers for taxpayers that meet the prevailing wage and apprentice requirements. The prevailing wage requirement obligates taxpayers to pay laborers and mechanics employed by the taxpayer, or any contractor or subcontractor associated with the project, a wage rate at least equal to the rates being paid for similar work in that locality, based on information published by the Department of Labor. The prevailing wages must be paid during construction and, in some cases, for the alteration and repair of the project for a period of time after the it is placed in service. The apprenticeship requirements encourage taxpayers to use an applicable percentage of apprentice labor hours in the construction of eligible facilities and maintain “apprentice-to-journey worker ratios” for crews of four or more individuals.
Further pushing the goal of energy independence, the IRA sets forth criteria for domestic sourcing of materials and domestic assembly, which positively or negatively impacts taxpayer eligibility and credit amounts for some incentives.
2. Extension and Modification of the Renewable Electricity Production Credit (IRC Sec 45)
The Act extends the deadline for when construction must begin in order to take advantage of certain renewable electricity production facility credits through the end of 2024. As part of this extension, solar facilities are again eligible for the production tax credit, which originally sunset in 2006.
The IRA reduces the overall base rate of the credit, but facilities that pay prevailing wages during construction and operations and meet apprenticeship requirements can qualify for up to five times the base amount of the credit. There is also the possibility to increase the credit by an additional 10% for facilities that are placed in service in an “energy community,” or that meet domestic content requirements.
3. Extension and Modification of the Energy Investment Tax Credit (IRC Sec 48)
The IRA extends the Section 48 Investment Tax Credit (ITC), which allows taxpayers to claim a tax credit for the cost of energy property. For most types of energy property, the beginning of construction requirement is extended to before January 1, 2025. Note that certain types of geothermal property used for heating and cooling a structure have a beginning of construction deadline of December 31, 2034.
In addition to the extension, the IRA expands the definition of energy property to include new types of energy property, most notably energy storage technology. The base amount of the available credit for most property is reduced to 6%; however, a bonus multiplier that adjusts the credit to 30% is permitted if prevailing wage and apprenticeship requirements are met. An additional 10% bonus credit is also available for meeting domestic content requirements. In addition, property associated with the interconnections of systems less than five megawatts to the grid is now eligible for the ITC. We expect most taxpayers to aim to construct projects that achieve eligibility for at least a 30% credit.
4. Increase in Energy Credit for Solar and Wind Facilities Placed in Service in Connection with Low-Income Communities
Added to the Sec 48 energy investment tax credits is an allocation of credits earmarked for “environmental justice solar and wind capacity.” The provision applies to projects placed in service in calendar years 2023 or 2024 and allows for an added credit for qualified solar and wind facilities with maximum net output of less than five megawatts located in a low-income community or on Indian land. The provision makes available a 10% bonus credit if property is in a specified community and an additional 20% credit available if the property is part of a qualified low-income residential building project or a low-income economic benefit project. Congress has directed Treasury to devise a program to allocate such credits to taxpayers based on a forthcoming application process
5. Extended Credits for Biodiesel, Alternative Fuel and Alternative Fuel Mixtures
The IRA extends the income and excise tax credits for biodiesel, renewable diesel, and biodiesel mixtures through 2024. The biodiesel and biodiesel mixture income and excise tax credit rate are $1 per gallon; the alternative fuels and alternative fuels mixture credit is $0.50; and the small agri-biodiesel producer credit is $0.10 per gallon. The credit rates are applicable to any sales after December 31, 2021.
6. Modification of Energy Efficient Commercial Buildings Deduction (IRC Sec 179D)
Commercial buildings now only have to reduce their energy use by 25%, down from 50% previously, to meet the minimum energy efficient commercial building property standard and receive the related deduction.
The IRA also modifies the formula for computing the maximum amount of energy-efficient commercial buildings deduction. While the change in formula has made larger deductions available, the law also eliminates the partial deduction for property that does not meet the certification standard. Taxpayers are eligible for additional deductions if prevailing wage and apprentice requirements are met. The new provisions allow tax-exempt entities to allocate the deduction to the person primarily responsible for designing the property. Previously, only governmental entities were permitted to make such allocations.
7. Extension, Increase and Modification of New Energy Efficient Home Credit (IRC Sec 45L)
The IRA extends through 2032 the new energy-efficient home business credit for contractors who manufacture or construct energy-efficient homes. The credit amount available can be $500, $1,000, $2,500, or $5,000 per unit based on the type of home built and the energy efficient home requirements the home satisfies.
Generally, single-family, and multifamily units that meet the Department of Energy Zero Energy Ready Home Program requirements are eligible for the highest credit. Importantly, to receive the maximum credit for multifamily units, taxpayers will need to satisfy the prevailing wage requirement throughout construction.
8. Extension and Modification of Nonbusiness Energy Property (IRC Sec 25C)
For individual taxpayers, the IRA extends the nonbusiness energy property credit through 2032. It also changes the credit rate to 30% for
- Qualified energy efficiency improvements, such as building envelope components like insulation, exterior windows, and exterior doors; and
- Residential energy property expenditures, including furnaces, central air conditioners, water heaters, etc.
The Act replaces the $500 lifetime limit with a $1,200 annual limit for these credits Generally, the changes apply to property placed in service after 2022. Beginning after calendar year 2024, special identification numbers will be required to claim the credits.
9. Extension and Modification of Residential Energy Efficient Property Credit (IRC Sec 25D)
Section 25D credit for qualified residential clean energy property expenditures like solar electric, solar water heating, small wind energy, and geothermal heat pumps is increased from 26% to 30% for property placed in service after 2021. The definition of eligible property is expanded to include battery storage technology. Eligibility for the full credit is extended through 2032 and phased out after 2034.
10. Extension and Expansion of Advanced Energy Project Credit (IRC Sec 48C)
The IRA extends and expands the qualified advanced energy property credit under Sec 48C. These advanced energy project credits are equal to 30% of the qualified investment and are competitively awarded by Treasury for clean energy efficiency manufacturing projects. The original program was introduced as part of the American Recovery and Reinvestment Act of 2009 and received more applicants than Treasury could fund when Congress had authorized a $2.3 billion allocation of credits. This extension will allow Treasury to allocate an additional $10 billion in tax credits to qualified projects starting in 2023. The eligible credit available to applicants is reduced if the projects do not satisfy the prevailing wage and apprenticeship requirements.
11. Addition of New Advanced Manufacturing Production Credit (IRC Sec 45X)
The Act provides for a new production credit for eligible components produced and sold in the US. Eligible components include any:
- Solar energy component, such as photovoltaic cells, photovoltaic wafers and solar grade polysilicon;
- Wind energy component, such as wind blades, nacelles, towers and offshore foundations;
- Inverter described by the tax code;
- Qualifying battery component, including battery electrode active materials and cells; and
- Applicable critical mineral.
The credit available is based on either mass, watt-capacity, sales price, or production cost and requires the components be produced and sold before January 1, 2030.
12. Changes to Clean Vehicle Credit
Some of the most widely applicable provisions of the IRA are the changes to the Clean Vehicle Credit. The $7,500 maximum credit available is split into two parts: a $3,750 credit for meeting the critical minerals requirement and $3,750 for meeting the battery component requirement. The IRA incentivizes car manufacturers to source materials domestically and from countries with which the U.S. has good trading relationships, and to have final assembly occur in North America.
Eligibility requirements become more stringent over time, which will likely force U.S. auto manufacturers to create alternative supply chains. The new credit applies to vehicles placed in service after 2022 with the final assembly requirement applying to vehicles sold after the date of enactment (August 16, 2022).
New in the IRA is a limitation of the credit to taxpayers with adjusted gross income above $300,000 married filing joint, $225,000 for head of household, and $150,000 for all other filing statuses. The IRA also allows for the transfer of the credit to the registered dealer in exchange for payment from the dealer. The Clean Vehicle Credit is set to expire after 2032. Importantly, manufactures producing electric vehicles eligible for the new Clean Vehicle Credit are no longer subject to lifetime caps on the number of vehicles eligible for the credit. This allows some manufacturers to now sell vehicles eligible for credits going forward. If you are buying a vehicle, carefully confirm both the vehicle’s eligibility, as well as your own eligibility under the income limits.
13. Implementation of a Nonrefundable Credit for Previously Owned Clean Vehicles
The IRA implements a nonrefundable income tax credit for qualifying previously owned clean vehicles bought by individuals whose modified adjusted gross income does not exceed $150,000 married filing joint, $112,500 for head of household, or $75,000 for individuals. The available credit is equal to the lesser of $4,000 or 30% of the vehicle’s sale price. The credit is only available for qualified sales of a motor vehicle from a dealer for a price of $25,000 or less. Like the previously discussed Clean Vehicle Credit, this credit is also transferable to a registered dealer in exchange for payment from the dealer. The credit applies to vehicles acquired after 2022 and terminates after 2032.
14. Extension and Modification of Alternative Fuel Vehicle Refueling Property Credit
The Act extends the alternative fuel vehicle refueling property credit for property placed in service by a business or at taxpayer’s principal residence through 2032. For property used in a trade or business, the base credit rate is reduced 6%, but it can be increased to 30% if prevailing wages and apprenticeship requirements are met during installation.
15. Addition of Direct Pay Elections and Transfer of Eligible Credits
The Act introduces two options that allow taxpayers to better monetize a variety of clean energy credits: direct-pay election and transferability. The direct-pay election is available to applicable entities such as tax-exempt organizations and state and local governments and would allow them to receive cash payment in lieu of tax credits. The law also allows taxpayers who are not applicable entities to sell or otherwise transfer their credits to third parties. This would allow taxpayers who otherwise would not have the ability to use the full benefit of the tax credits to sell them for cash consideration. Ultimately, this provision has the potential to reduce the necessity for certain tax equity financing structures.
While it is unclear whether the Inflation Reduction Act of 2022 will reach the stated goal of its title, taxpayers who plan around the IRA’s clean energy provisions and choose to invest have significant opportunities to both leverage these incentives for financing and reduce their own tax burden. As stated above, care must be taken to meet all applicable requirements.
Contact Kevin Carney at email@example.com, Dave Sobochan at firstname.lastname@example.org, Mike McGivney at email@example.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.