On Aug. 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (IRA), which includes various amendments and additions to the Internal Revenue Code of 1986 (the Code). This is the second of two alerts from our Tax Group (the first can be found here). This alert describes several new and revised tax incentives for clean energy projects.
Among other changes, the IRA made material changes to the Production Tax Credit (PTC) and the Investment Tax Credit (ITC).
Production Tax Credit
The PTC is a 2.6 cents per kWh credit (to be adjusted for inflation) available for electricity produced at qualified facilities, including wind, biomass, geothermal, landfill gas, and hydropower. The IRA also reinstates the PTC for solar facilities that have been able to use only the ITCs since 2006.
Under the IRA, the PTC will be broken into a base credit (20 percent of the credit amount) and an increased credit (80 percent of the credit amount), with the increased credit being available for projects that satisfy prevailing wage and apprenticeship requirements. Therefore, to qualify for the full 2.6 cents per kWh credit, taxpayers will be required to satisfy the yet-to-be-published prevailing wage and apprenticeship guidelines. Note, however, that the wage and apprenticeship requirements will not apply to projects if construction begins prior to the date that is 60 days after the IRS publishes guidance establishing the new guidelines.
The new PTC regime will apply to any projects for which construction begins before January 1, 2024.
Investment Tax Credit
The ITC is a credit equal to 30 percent of the qualified costs of eligible projects. The IRA expands the technologies that can benefit from the ITC to include, among others, standalone energy storage, and biogas projects. To be eligible for the enhanced ITC, a taxpayer must place the qualified project in service after December 31, 2022. Taxpayers with projects that are eligible for both the ITC and PTC may still elect to claim the ITC in lieu of the PTC.
Like the PTC, the ITC now will have a base credit (6 percent) and increased credit (24 percent) component. Projects for which construction begins after the date that is 60 days after published guidance on the wage and apprenticeship guidelines will be eligible for the full 30 percent credit only if the guidelines are met.
The new ITC regime will apply to any projects for which construction begins before January 1, 2024.
PTC and ITC—Additional Bonus Credits
Both the ITC and PTC can be increased by an additional 10 percent (i.e., up to 40 percent in the case of the ITC) if projects meet “domestic content” requirements. The domestic content requirements will be satisfied if (i) 100 percent of the steel or iron used in a qualifying project is produced in the United States, and (ii) 40 percent of the manufactured products that are used in constructing the project are produced in the United States. The 40 percent test will be satisfied if at least 40 percent of the total costs of all components are attributable to products that are produced or manufactured in the United States.
A taxpayer also can earn an additional 10 percent PTC or ITC (i.e., up to 40 percent in the case of the ITC) if a project is located in an “energy community,” which includes: (i) a brownfield site, (ii) areas with substantial coal, oil, or natural gas production, which have an unemployment rate above the national average, or (iii) census tracts which encompass closed coal mines or closed coal-fired electric generating units.
Reduction of Certain Tax Credits where Tax-Exempt Financing is Used
In the case of the PTC, ITC, and the credits described in Code Sections 45Q, 45V, and 48E, all as described below, the available credit is reduced, up to a maximum of 15 percent, by the amount of tax-exempt financing used to finance the credit generating facility.
Direct Pay and Credit Transfer
For the first time, the IRA will allow PTC and ITC recipients (along with recipients of several of the newly enacted credits described below) to monetize credits through a “direct pay” option or by selling all or a portion of the credits.
The direct pay option allows many entities that are not subject to federal income tax to make an election (by the due date of their tax return for the year in which the election is made, or by a to-be-determined date in the case of entities not required to file a return) to receive a cash payment equal to the amount of otherwise allowable credits. The direct pay option also is available to taxpayers (other than entities that are not subject to tax) claiming the production of clean hydrogen and carbon oxide sequestration credit or the advanced manufacturing production credit (but for the first five years of the credit period only).
Note that, although tax-exempt entities will be able to monetize credits in a way that was not previously available, there remains no mechanism for tax-exempt entities to take advantage of accelerated depreciation.
The transferability provisions allow taxpayers that have earned the credits to sell the credits—for cash—to another unrelated taxpayer by making an irrevocable election by the due date of the return for the year in which the credit is claimed. The buyer of a credit may not deduct the cost paid for the credit and the payment will not be included in the income of the taxpayer that sells the credit. In addition, the buyer of the credit may not sell any part of the purchased credit. Taxpayers that sell credits in excess of what they properly could claim directly are subject to penalties.
Both the monetization and transferability options are subject to basis reduction and recapture rules. In addition, under both options, the election with respect to credits earned by entities that are treated as partnerships or S corporations for federal income tax purposes must be made at the entity level.
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In addition to materially changing the rules applicable to the PTC and ITC, the IRA added several new tax credit provisions and extended others, many of which are governed by rules similar to those that apply to the PTC and ITC, as amended.
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Tax Credit |
Explanation |
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Carbon Oxide Sequestration Credit; Code §45Q |
Prior to the IRA, Section 45Q of the Code allowed a tax credit for qualified carbon oxide captured by qualified projects. The IRA expanded the eligibility of carbon oxide sequestration projects to qualify for the credit by lowering the threshold of required captured qualified carbon oxides for qualified projects. In addition, the IRA increased the availability of the credit with respect to qualifying projects by increasing the credit rate per metric-ton of qualified carbon oxide captured by qualified projects. The IRA additionally eased the monetization of the credits by enabling taxpayers to utilize a direct pay option, or sell portions of the credit. |
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Zero-Emission Nuclear Power Production Credit; Code §45U |
The IRA creates a new tax credit for electricity produced by the taxpayer at a qualified nuclear power facility and sold to an unrelated person after on or after January 1, 2023, and before January 1, 2033. The credit applies to facilities that were placed in service before August 16, 2022. The amount of the credit is increased if prevailing wage and apprenticeship requirements are satisfied. |
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Tax Credit for Biodiesel, Renewable Diesel, and Alternative Fuels; Code §40A |
Prior to the IRA, Section 40A of the Code allowed a tax credit for biodiesel, renewable diesel, biodiesel mixtures, alternative fuel, and alternative fuel mixtures, which expired on December 31, 2021. The IRA extended this credit through 2024 for fuel sold or used after December 31, 2021. In addition, the IRA excludes sustainable aviation fuel produced from biodiesel fuel. Such fuel, however, is eligible for the new sustainable aviation fuel credit discussed below. |
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Second Generation Biofuel Credit; Code §40 |
Prior to the IRA, Section 40 of the Code allowed a tax credit for selling, using, or in limited instances producing second generation biofuel. This credit expired on December 31, 2021. The IRA reinstated and extended the credit through 2024 with respect to second generation biofuel that is produced after December 31, 2021. |
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Sustainable Aviation Fuel Credit; Code §§40B and 6426(k) |
The IRA creates a new tax credit for each gallon of sustainable aviation fuel sold or imported and first used as part of a qualified fuel mixture. “Qualified fuel mixture” means a mixture of sustainable aviation fuel and kerosene if such mixture was produced by the taxpayer in the United States such mixture is used by the taxpayer or sold by the taxpayer for use in an aircraft, such sale or use is in the ordinary course of a trade or business of the taxpayer, and the transfer of such mixture to the fuel tank of such aircraft occurs in the United States. The credit applies to sustainable aviation fuel sold or first used in the United States in 2023 and 2024. |
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Credit for Production of Clean Hydrogen; Code §§45V and 45(e)(13) |
The IRA creates a new tax credit for the production of clean hydrogen during the 10-year period beginning on the date a qualifying facility is originally placed in service. The credit applies to clean hydrogen produced after December 31, 2022. To be eligible for such credit, the hydrogen must be produced in the U.S. or a possession of the U.S., in the ordinary course of a trade or business, for sale or use. The production, sale and use of such hydrogen must be verified by an unrelated party. The credit is reduced for tax-exempt bonds. |
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Nonbusiness Energy Property Tax Credit; Code §25C |
Prior to the IRA, Section 25C of the Code allowed individual taxpayers to claim a tax credit for qualified residential energy efficiency improvements installed during the tax year and residential energy property expenditures paid or incurred during the tax year. This credit expired on December 31, 2021. The IRA extends the existing credit through 2032 for property placed in service after December 31, 2021, and increases the benefits available for property placed in service after December 31, 2022. Specifically, for property placed on service after December 31, 2022, the IRA (i) increases the credit rate to 30 percent, (ii) replaces the lifetime credit cap of $500 with a $1,200 annual limit, (iii) modifies limits for specific types of property and (iv) modifies the standards for qualified energy-efficiency improvements. |
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Residential Energy Efficient Property Credit; Code §25D |
Prior to the IRA, Section 25D of the Code allowed individual taxpayers to claim a tax credit for qualified energy efficiency property expenditures made during the tax year. This credit was set to expire with respect to property placed in service after December 31, 2023. The IRA extends the residential energy-efficient property credit through 2034. The IRS also added a new credit for battery storage technology expenditures in lieu of the credit for biomass fuel property expenditures. The amendment applies to expenditures made after December 31, 2022. |
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Energy Efficient Home Credit; Code §45L |
Prior to the IRA, Section 45L of the Code allowed contractors that construct residential homes that meet certain energy saving requirements to claim a tax credit. This credit expired December 31, 2021. The IRA extended the credit through 2032 for residences acquired after December 31, 2021. The IRA increases the available credit amount, reduces the energy saving thresholds with respect to constructed residences, and provides for credit enhancements for qualified residences that satisfy wage and apprenticeship requirements with respect to construction. The IRA modifications to the credit apply to residences acquired from an eligible contractor after December 31, 2022. |
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Qualified Plug-In Electric Drive Motor Vehicle Credit; Code §30D |
The IRA increased the eligible clean vehicle tax credit under Code Section 30D for electric vehicles that meet certain requirements with respect to minerals and battery inputs in the vehicle. The IRA eliminates the availability of the credit after December 31, 2023, for vehicles with battery components manufactured by “foreign entities of concern,” and additionally adds a requirement that vehicles’ final assembly occur in North America. The IRA imposes certain restrictions on the availability of credits based upon certain income thresholds of the taxpayer. The IRA modifications to this credit generally apply to vehicles placed in service after December 31, 2022. |
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Credit for Previously Owned Clean Vehicles; Code §25E |
The IRA creates a new tax credit for individual taxpayers that purchase certain previously owned, clean energy vehicles. The IRA requires the taxpayer meet certain adjusted gross income requirements to claim this credit; the credit terminates after December 31, 2032, and generally applies to vehicles purchased after December 31, 2022. |
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Qualified Commercial Clean Vehicles; Code §45W |
The IRA creates a new tax credit for qualified commercial clean vehicles acquired before January 1, 2033. The credit is available for vehicles acquired after December 31, 2022, and the credit expires after December 31, 2032. |
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Alternative Fuel Vehicle Refueling Property Credit; Code §30C |
Prior to the IRA, Section 30C of the Code allowed a tax credit for certain costs of qualified alternative fuel refueling property. The credit expired December 31, 2021. The IRA extended the credit through 2032 for qualified property placed in service after December 31, 2021. The IRA modified the credit by lowering the credit rate for certain depreciable property. The IRA additionally expands the eligible credit rate for any depreciable qualified alternative fuel refueling property that is part of a refueling project that satisfies wage and apprenticeship requirements and begins within a certain specified time frame. The IRA also requires certain qualifying property be placed in specific geographic areas based on density or income demographics to qualify for the credit. IRA modifications generally apply to property placed in service after December 31, 2022. |
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Advanced Energy Project Credit; Code §48C |
The IRA expands tax credits allowed under Section 48C of the Code for certain clean energy manufacturing projects. Effective January 1, 2023, the IRA provides as much as $10 billion in new credit allocation, reduces the credit rate by 80 percent for projects that fail to satisfy wage and apprenticeship requirements, and modifies the definition of “qualifying advanced energy project.” |
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Advanced Manufacturing Production Credit; Code §45X |
The IRA creates a new tax credit for the production of certain “eligible components” of property critical to solar and wind developments. Eligible components may consist of eligible solar energy components, eligible wind energy components, eligible inverters, qualified battery components, and applicable critical minerals. Eligible components generally must be produced by the taxpayer in the United States, or in a United States possession, and sold to an unrelated person. The new credit is available for eligible components and minerals produced and sold after December 31, 2022. |
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Clean Electricity Production Credit; Code §45Y |
The IRA creates a new tax credit for qualified electricity producing facilities placed in service after December 31, 2024, which maintain a greenhouse gas emission rate not greater than zero. The IRA permits an enhanced credit if certain wage and apprenticeship requirements are satisfied. The IRA phases out the credit one year after the later of: (i) December 31, 2032, or (ii) the year in which U.S. annual greenhouse gas emissions from electricity production are less than 25 percent of the 2022 emission rate. |
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Clean Electricity Investment Credit; Code §48E |
The IRA creates a new tax credit for investment in energy storage and qualified facilities placed into service after December 31, 2024, if the greenhouse gas emissions rate of the project is zero or less. The credit is generally calculated based on qualifying investment costs but can be increased if certain output tests are satisfied and if the project satisfies wage and apprentice requirements. The credit begins to phase out in the later of: (i) December 31, 2032, or (ii) the year in which U.S. annual greenhouse gas emissions from electricity production are less than 25 percent of the 2022 emission rate. |
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Clean Fuel Production Credit; Code §45Z |
The IRA creates a new tax credit for certain clean fuel that meets emission standards and that the taxpayer sells for qualifying purposes. Generally, the credit is calculated based on a percentage of clean fuel produced, and may be enhanced if the taxpayer satisfies wage and apprentice requirements. The credit is available for clean fuel produced after December 31, 2024 and sold before January 1, 2028. |
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Reinstatement of Superfund Hazardous Substance Tax; Code §§4611, 9507(d)(3)(B) |
Effective January 1, 2023, the IRA resurrects a long-expired excise tax on crude oil and imported petroleum products at the rate of 16.4 cents per gallon (adjusted for inflation), which excise tax is used to replenish the Superfund. |
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Depreciation for Qualified Facilities, Qualified Property, and Energy Storage Technology; Code §168(e)(3)(B) |
The IRA provides that qualified facilities for purposes of the new clean electricity production credit and qualified property or energy storage technology for purposes of the clean electricity investment credit that are placed into service after December 31, 2024, are treated as five-year property for depreciation purposes This will allow taxpayers who place such property into service before January 1, 2027, to take advantage of bonus depreciation under Code Section 168(k). |
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Efficient Commercial Buildings Deduction; Code §179D |
The IRA materially changes the deduction allowed under Code Section 179D for energy efficient buildings. Since 2006, this deduction has encouraged commercial building owners to install energy-efficient systems by providing an immediate deduction for installation costs. The changes to the deduction include:
The IRS also allows tax-exempt entities to take advantage of the deduction through the direct pay mechanism described above. |
The Ballard Spahr Tax Group will monitor the guidance issued regarding these changes and other developments related to energy credits and incentives. If you have questions about the IRA or other tax issues, please contact us.
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