There’s been much talk lately about the clean energy federal tax credits supplied by the Inflation Reduction Act (IRA), particularly regarding bonus and enhanced rates on the renewable electricity production tax credit (PTC) and Investment Tax Credit (ITC). These credits provide competitive incentives and cash flow opportunities for many companies. In some cases, businesses that were previously ineligible are now able to qualify under the IRA. However, as with many credit programs, receiving the benefit normally relies on one major factor: the documentation.
Enhanced PTC and ITC are available only if taxpayers meet certain prevailing wage and apprenticeship, domestic content and community requirements. Additionally, the language in the Act requires taxpayers to maintain accurate and contemporaneous documentation necessary to support credit eligibility. If, as a taxpayer, you don’t meet these documentation requirements, it could result in recapture and penalties, which would significantly impact the overall benefit of the credits themselves.
To help ensure you are appropriately claiming and defending the various credits and meeting documentation requirements, certain attestation engagements, such as an Agreed Upon Procedures (AUPs), could help.
What Requirements Must You Meet to Claim the PTC and ITC?
Before we discuss how to support your eligibility for the PTC or ITC, let’s talk about the four key new provisions of the IRA.
1. Prevailing Wage and Apprenticeship Requirements
Under the Act, certain credits are available only if you meet specific prevailing wage and apprenticeship requirements. The prevailing wage provisions require you to ensure any laborers and mechanics employed by you, contractors and subcontractors be paid prevailing wages during the construction of the applicable project and, in some cases, for the alteration and repair of such project for a defined period after the project is placed in service.
The apprenticeship provisions require that qualified apprentices perform the applicable percentage of total labor hours of construction, alteration or repair work prior to the project being placed in service.
Failure to comply with the prevailing wage provision can result in an 80% reduction in the ITC. You could solve this issue by tracking down laborers and remitting any wage shortfall (including interest) and a $5,000 penalty for each shortfall. If it is determined you intentionally disregarded the requirements, the wage shortfall payment is increased three-fold and the penalty is increased to $10,000 per employee.
Similar penalties exist for failure to satisfy the apprenticeship requirement. However, this provision includes a “good faith effort” exception to include situations where you request qualified apprentices from a registered program but receive no response from your project’s locality, or the request is denied.
2. Domestic Content Enhancement
The IRA also provides for an increased credit rate for PTC and ITC projects that satisfy domestic content requirements. It is required that any steel, iron or manufactured product that is a component of the applicable facility (in the case of the PTC) or project (in the case of the ITC) upon completion of construction must be produced in the U.S. Under the Act, manufactured products will satisfy this requirement if more than 40% (or 20% for offshore wind facilities) of the total costs of all such manufactured products of the facility or project are attributable to manufactured products (including components) that are mined, produced or manufactured in the U.S.
The requirement can be waived if using steel, iron or manufactured products produced in the U.S.:
- Increases the overall costs of the construction by more than 25 percent, or
- If the relevant products are not produced in the U.S. in sufficient and reasonably available quantities, or
- They are not of satisfactory quality.
The domestic content bonus is only available for projects placed in service after December 31, 2022.
3. Energy Community Enhancement
The Act provides for an enhanced ITC and PTC for projects placed in service within an energy community. “Energy community” includes:
- Certain brownfield sites;
- A census tract or any adjacent census tract in which a coal mine has closed after 1999, or a coal-fired electric generating unit has been retired after 2009; and
- A metropolitan or nonmetropolitan statistical area that:
- At any time after 2009 has had at least 0.17% direct employment or 25% local tax revenues from the extraction, processing, transport or storage of coal, oil or natural gas; and
- Had an unemployment rate at or above the national average for the previous year, in each case as determined by the Secretary.
The Energy Community Enhancement Bonus is only available for projects placed in service after January 1, 2023.
4. Low-Income Community Enhancement
The IRA provides an enhanced ITC for wind and solar projects located in a low-income community and have a nameplate capacity of 5 MW or less, and for which the Secretary makes an allocation of “environmental justice solar capacity limitation.” There are currently no special rules for solar or wind facilities placed in service in connection with low-income communities; however, we expect the allocation of such capacity limitation to be a competitive process.
How Can Agreed Upon Procedures Help You Claim the PTC and ITC?
The eligibility and value of the PTC and ITC can have a material impact on whether or not your project makes economic sense. However, due to the nature of the above requirements, compliance can be tricky and will generally call for varying levels of planning and cooperation with internal and external parties — such as your HR Department, engineering, operations, legal and construction contractors.
An attestation engagement, such as an agreed upon procedure (AUP), can use procedures similar to an audit but on a much smaller or limited scale to help collate and confirm critical information from the various parties. AUPs are generally used to identify and verify specific financial or non-financial information. In the case of claiming or defending tax credits in the IRA, an AUP can provide information that helps companies and third parties feel confident they are maintaining the necessary documentation and meeting the Act’s specific requirements. For example, a resulting AUP report could encompass working with your Finance Department to create a complete picture as to the wages you’re paying laborers and that those wages meet the Department of Labor’s prevailing wage guidance in the IRA.
AUPs can help determine your eligibility for and help navigate and maximize any potential tax credits. First and foremost, familiarize yourself with the Act, as it will have a significant impact on both the wind and solar industries, along with other “clean” energy companies. From there, determine which credits are applicable to you. Being proactive will help ensure you have complied with all existing requirements and are taking advantage of an important legislative package designed to give significant tax incentives to the renewable energy industry. However, be cognizant that additional guidance is likely needed regarding the application of some of these requirements, so work in conjunction with your advisers as you work toward claiming the credits for your business.
Contact Gino Scipione at email@example.com, Sarah Lee at firstname.lastname@example.org 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.