The Inflation Reduction Act reinstated Section 48C, which offers $10 billion in tax credits for qualified investments in new, expanded or re-equipped manufacturing facilities that produce certain emissions-reducing technologies.
Recently, the IRS provided initial guidance via Notice 2023-18 on how, and when, taxpayers can apply for the credits, which include a base credit of 6% of qualifying investment and a bonus credit of 30%, if prevailing wage and apprenticeship requirements are met. The multi-step application process opens May 31, 2023, but planning now will be key to getting your foot in the door of what may be a very competitive process.
What Types of Projects Qualify for the Energy Investment Tax Credit Program?
There are three broad categories of qualifying advanced energy projects.
Clean Energy Manufacturing and Recycling Projects
The project must re-equip, expand or establish an industrial or manufacturing facility for the production or recycling of advanced energy property, which includes:
- Property designed to produce energy from sun, water, wind, geothermal deposits or other renewable resources;
- Fuel cells, microturbines or energy storage systems;
- Electric grid modernization equipment and components;
- Property designed to capture, remove, use or sequester carbon oxide emissions;
- Equipment designed to refine, electrolyze or blend any fuel, chemical or product that is renewable or is low carbon and low emission;
- Property designed to produce energy conservation technologies; or
- Hybrid vehicles with gross vehicle weight of at least 14,000 pounds and related technologies, components and materials.
Greenhouse Gas Reduction Projects
The project must re-equip an industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at least 20% through the installation of:
- Low or zero carbon process heat systems;
- Carbon capture, transport, utilization and storage systems;
- Industrial processes that improve energy efficiency and reduce waste; or
- Any other industrial technology designed to reduce greenhouse gas emissions, as determined by the Secretary of Treasury.
Critical Material Projects
The project must re-equip, expand or establish an industrial facility for the processing, refining or recycling of critical materials.
A Few Twists to the Program
There are a few nuances to understand before applying to the energy tax credit program:
- There is an emphasis on projects and investments in certain energy communities, for which the IRS has reserved $4 billion of the $10 billion in credits. These energy communities include locations that have been or are heavily dependent on fossil fuels as a driver of local economic activity, employment and government revenue.
- This revised program also offers something previous iterations did not — eligibility for direct pay or transferability of these credits. These options will allow taxpayers to monetize projects in ways not previously available in the tax planning community.
- The program under Section 48C denies “double-dipping” for projects receiving credits under certain other clean energy credit programs.
How Can You Claim the Energy Investment Tax Credits?
To claim the highest credit — 30% — you must meet the prevailing wage and apprenticeship requirements. That means you must:
- Ensure laborers and mechanics employed on the qualified project are paid at least prevailing rates for construction in the area where the project is located, as determined by the Secretary of Labor; and
- Use qualified apprentices on the qualified project, and they must perform at least the applicable percentage (10% - 12% - 15%) of the total hours on the project. The applicable percentage is determined based on the year you will start the project.
If you fail to satisfy either the prevailing wage or apprenticeship requirements, you could still reconcile these issues and potentially qualify for the highest available credit through certain correction and penalty mechanisms outlined by the Secretary of Treasury.
As for the application process itself, the IRS and Treasury have outlined at least the initial process and requirements for interested taxpayers:
- Beginning May 31, 2023, you can submit a concept paper to the Department of Energy (DOE) eXCHANGE portal. The deadline for submitting a concept paper for the first round of credits is July 31, 2023.
- The DOE will review and respond, either encouraging or discouraging taxpayers to submit a full application to the program. Note, regardless of the DOE’s response letter, if you submit a concept paper, you are eligible to submit an application.
- The next step is to submit an application through the eXCHANGE portal. The DOE will review applications to ensure they comply with eligibility and other threshold requirements. For those that meet the requirements, the DOE will then conduct a technical review and provide the IRS with recommendations and rankings regarding which applications they should consider accepting or rejecting.
- The IRS makes the final decision on who will be accepted into the program and will notify the awardees via a hard copy letter.
- Once the application process is complete, if you have been awarded a credit allocation you will have two years to place the project in service and to notify the DOE your project has met the certification requirements. If you do not place in service within that window or do not notify the DOE, you will forfeit your award.
We expect additional guidance from the IRS by May 31, 2023, that outlines the full application process, required documentation and timeline for awards.
Based on past iterations, the demand will likely exceed the supply of available funds, making the application for credits a very competitive process. If you intend to pursue these credits, it’s a good idea to start planning now and register on the eXCHANGE portal sooner rather than later.
Contact Katie Blake 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.