This Article has been updated to reflect changes since the Inflation Reduction Act passage to include subsequent guidance from Federal Agencies and a deeper understanding of the provisions in the bill related to clean energy and the Investment Tax Credit (ITC).
The passage of the Inflation Reduction Act in the summer of 2022 was a watershed moment in our country’s commitment to combating climate change that set the stage for long-lasting clean energy solutions, green jobs for America, and a reduction in greenhouse gas emissions. The law is complicated and technical, and when signed left some key details to be determined, specifically around labor standards and bonus Investment Tax Credit (ITC) credits. Many of the key provisions have since been ironed out by guidance from relevant federal agencies, while some provisions related to clean energy still require additional guidance. Please note for the provisions outlined below, direct pay is limited to tax-exempt and governmental entities.
Inflation Reduction Act extends tech-specific energy Investment Tax Credit to 2024
The Inflation Reduction Act increased the Investment Tax Credit from 26% to 30% for the next 10 years, and extends the date of construction for existing eligible projects (in most cases) to 2024. However, projects starting construction after January 30th, 2023, will have to meet prevailing wage and labor standards to get a full 30% ITC (Investment Tax Credit). If projects don’t meet those prevailing wage and apprenticeship standards, they will only be eligible for a 6% ITC.
Labor & Apprenticeship Standards
The major labor requirements to achieve the full Investment Tax Credit value of 30% are:
- All laborers and mechanics must be paid prevailing wages for work performed on a project.
- A certain % of all labor hours must be performed by someone in a federally registered apprenticeship program:
- 10% if construction begins on a qualified facility before January 1, 2023
- 12.5% if construction begins on a qualified facility between December 31, 2022 and January 1, 2024
- 15% if construction begins on a qualified facility after December 31, 2023
- All contractors and subcontractors on a project with 4 or more employees must employ at least 1 registered apprentice
Projects that are less than 1MW AC will not have to comply with the above labor standards to qualify for the full 30% ITC. This credit applies to solar energy property, geothermal property, fiber-optic solar property, fuel cell property, microturbine property, small wind property, offshore wind property, combined heat and power property, and waste energy recovery property constructed before January 1, 2025.
A 10% bonus is available for projects that meet domestic manufacturing requirements for steel, iron, or manufactured components. Final guidance has not been issued with respect to what will and will not qualify for the domestic manufacturing bonus credit.
Projects located in “energy communities” are eligible for a 10% bonus if they fall into any of the following categories:
- Closed coal facilities: All projects located in a census tract, and all adjacent census tracts, with a closed coal facility.
- Brownfields: Projects sited on federally recognized brownfields.
- Fossil Fuel Communities: MSA’s and non-MSA’s that have either 0.17% direct employment or receive 25% of tax base from fossil fuel related economic activity and have a higher than or equal unemployment than the national average in the previous year.
Starting in Q3 of 2023 projects will also be able to apply for an Environmental Justice credit worth 10% for projects located in low-income communities or on Tribal land and a 20% bonus for projects located in low-income residential buildings or part of low-income economic benefit projects.
The bonus credit will have an annual 1.8GW capacity allocation and be allocated as follows:
- Low-Income Communities (700MW)
- Tribal lands (200MW)
- Low-Income residential (200MW)
- Low-income economic benefit (700MW)
Projects from around the country will be able to apply for these credits but acceptance is not guaranteed. Further guidance is needed with respect to what exactly qualifies as a “low-income benefit projects”. We expect further guidance before applications are set to open in Q3 of 2023.
New tech-neutral ITC beginning 2025
The new 48D ITC, an emissions-based, neutral and flexible incentive, begins on January 1, 2025. 48D will have the same labor provisions listed above, as well as the same bonus ITC credits. The main difference being that taxpayers can select either a Production Tax Credit 45Y (PTC) or an ITC 48D.
These credits phase out either in 2032 or once emission targets are reached (for example, when the electric power sector emits 75% less carbon than 2022 levels). Facilities can claim at 100% credit value in the first year, then 75%, then 50%, and then 0%.
Commercial energy storage credit
A 30% credit is also available for energy storage technology, biogas property, microgrid controllers, dynamic glass, and linear generators constructed before January 1, 2025. The minimum battery size must be 5 kWh. Again, the base credit will be 6%, with an additional 24% available based on meeting any of the three conditions where the project:
- Is less than 1 MW AC maximum net output
- Starts less than 60 days after the Treasury issues guidance on how to meet prevailing wage and apprenticeship standards
- Adheres to prevailing wage and apprenticeship requirements
Transferring to monetize the credits
Developers (or companies) may also choose to transfer ITC or PTC to another taxpayer. Many tax credits included in the IRA allow direct payments to be made instead of reduced tax liability (“direct pay”). They may also monetize credits by transferring them to an entity with greater tax liability (“transferability”).
The mechanisms involved in this transfer are still being evaluated to understand how this would be applied practically. We need to better understand for example how a corporate minimum tax would affect the transfer of credits. We expect to have further clarity and understanding that we will share once available.
- Transfer-receiving party must pay for the credit in cash, and funds received for the credit are not included in the gross income of the original credit recipient – and the transferee cannot deduct the amount paid for the credit.
- Provisions include the process for transferring the credit within a partnership, and credit cannot be transferred twice.
- Companies can transfer (if they choose) for each taxable year during the 10 years after the project is placed in service.
- The Department of Energy requires info/disclosures to prevent improper or excessive payments.
While we have discussed updates for labor standards and some bonus ITC credits, additional guidance is still forthcoming on the domestic content bonus credit as well as the low-income economic benefit component of the environmental justice credits. The guidance on what will be considered eligible for the domestic content bonus credit will have massive implications on projects as well as the domestic supply chain. Stay tuned for further updates as the energy provisions in the IRA continue to take shape.
These are exciting times! According to an analysis from the American Clean Power Association, the Inflation Reduction Act could more than triple clean energy production in the US. It represents a giant step forward in America’s climate change goals. It also sets the stage for new manufacturing jobs, improved energy security, and a reliable and affordable energy sector for American families.
Originally published on 8/16/2022.