With the approval of Congress, President Biden has now signed the Inflation Reduction Act (IRA) into law, calling it “the largest investment ever in combatting the existential crisis of climate change.”
The new law is complicated and technical, but with the analysis done by Empower Energies’ policy team, I’ll summarize the four key provisions that set the stage for long-lasting clean energy solutions, green jobs for America, and a reduction in greenhouse gas emissions. Note that for each, direct pay is limited to tax-exempt and governmental entities.
IRA extends tech-specific energy investment credit to 2024
The IRA extends the date of construction (in most cases) to 2024 and provides a 10% or 30% tax credit:
- Maintains 30% credit for 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.
- Creates 30% credit for energy storage technology, biogas property, microgrid controllers, dynamic glass, and linear generators built before January 1, 2025.
- Applies a 10% bonus for meeting domestic manufacturing requirements for steel, iron, or manufactured components.
- Applies a 10% bonus for projects located in energy communities (defined as brownfield sites or fossil fuel communities).
New tech-neutral ITC beginning 2025
The new 48D ITC, an emissions-based, neutral and flexible incentive, begins on January 1, 2025. Taxpayers can select either a Production Tax Credit 45Y (PTC) or an ITC 48D, which:
- Creates a credit of 30% of the investment in the year the facility goes into service.
- Provides either a 6% ITC credit or 20% of the PTC level for construction started in 2025. Although an additional 24% on the ITC (or the full 100% of the PTC) is available, provided the following conditions are met, where the project:
- Is less than 1 MW AC maximum net output
- Meets prevailing wage and apprenticeship requirements
- Starts less than 60 days after Treasury guidance on meeting prevailing wage and apprenticeship standards
Additional credits are available provided certain standards are met:
- A 10% bonus for projects located in energy communities (brownfield sites or fossil fuel communities)
- A 10% bonus for meeting domestic manufacturing requirements for steel, iron, or manufactured components
- A 10% bonus 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
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, 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. How this would be affected by a corporate minimum tax for example needs to be better understood. 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.
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.