The Inflation Reduction Act of 2022 (IRA) has several primary goals, including: promoting clean energy, manufacturing, and construction through a broad range of tax incentives and subsidies; raising revenue through the main mechanisms of a new corporate alternative minimum tax and excise tax on corporate share buybacks; and managing medical expenses for individuals.
Importantly, the IRA establishes new or expanded tax credits for energy facilities that are renewable, have net zero carbon emissions, or serve low-income or disadvantaged communities. To combat the impact of closing traditional energy facilities, IRA programs provide funding for projects sponsored by governments, communities, or nonprofit organizations that address environmental justice issues in low-income or disadvantaged communities.
We discuss several of the tax credit provisions contained in the IRA that are designed to meet carbon-free energy goals as well as continue to ensure a reliable, safe, and affordable energy supply.
Renewable Electricity Generation Tax Credit Extensions – IRA § 13101
The Renewable Electricity Production Tax Credit (REPTC) is an existing credit governed by § 45 of the Internal Revenue Code of 1986. The REPTC is a credit of 1.5 cents per kilowatt hour available to energy facilities for sold energy produced by renewable energy resources. Qualified energy resources under Code § 45(c) are wind, closed-loop biomass, geothermal, solar, small-scale irrigation, municipal solid waste, qualified hydropower generation, and marine and hydrokinetic renewable energy.
Extended construction deadlines: Under current law, the REPTC is only available to solar facilities that were commissioned before January 1, 2006, and other facilities that began construction before January 1, 2022. The IRA extends the REPTC to facilities that begin to are built before January 1, 2025.
Energy Credit Extensions – IRA § 13102
The energy credit is an existing investment tax credit defined by Code § 48. The energy credit is calculated as a percentage of the basis of certain electricity-generating property placed in service during the tax year for which depreciation is available. Eligible property includes fuel cell power plants, solar power generation equipment, geothermal power, small wind turbines (turbines with an individual capacity of 100 kilowatts or less), or combined heat and power systems. The IRA extends eligibility to biogas proprietary energy storage technologies and microgrid controllers.
Taxpayers cannot claim an energy credit for property in a facility where the taxpayer has claimed a REPTC in the current or any previous year. To retain the energy credit, taxpayers may choose to claim the energy credit for property located in a REPTC-eligible facility instead of claiming the REPTC. This selection is only available for equipment commissioned after 2008.
Extended construction deadlines: Under current law, the energy credit is available for properties that begin construction before January 1, 2024. The IRA extends this date to January 1, 2025.
Additional credit for solar and wind facilities in low-income communities
An additional credit of up to 20 percent of the energy credit may be available for solar and wind facilities if the facility serves a low-income community and the Secretary of the Treasury selects the facility for “environmentally fair solar and wind capacity allocation. ” The Secretary will establish rules for electing facilities to receive this increased credit within 180 days after the enactment of the IRA.
To qualify for the increased credit allocation, a solar or wind facility must:
Be commissioned after December 31, 2021 and begin construction before January 1, 2025;
Have a maximum net power of less than 5 megawatts; and
Be in a “low-income community” or be part of a “low-income benefit project.”
“Low-income community” means a census tract where either (A) the poverty rate is at least 20 percent, or (B) the median family income for the area is less than 80 percent of the statewide median family income (or metropolitan median family income per area for areas located in a metropolitan area).
A facility is part of a “low-income benefit project” if at least 50 percent of the financial benefits of the electricity generated are provided to households with incomes below 200 percent of the federal poverty line or below 80 percent of the area median gross income. Energy acquired at below-market prices is considered a financial benefit.
New Clean Energy Production Credit – IRA § 13701
The IRA introduces a new Clean Energy Production Tax Credit (CEPC), which will be codified at Code § 45Y. The CEPC is a kilowatt-hour credit available for new or expanded electricity generation facilities with a net zero greenhouse gas emission rate. Qualifying facilities will also be eligible for reimbursement under Code § 168.
Construction period: To be eligible for the CEPC, a facility must be commissioned after December 31, 2024. Existing facilities that commission new units or otherwise increase capacity after December 31, 2024 are also eligible for the CEPC , but only to increase capacity. The CEPC is available for 10 years after the date the facility is commissioned.
A facility is not eligible for CEPC if the taxpayer has claimed a credit under Code §§ 45 (REPTC), 45J (advanced nuclear power facility credit), 45Q (carbon sequestration credit), 45U (nuclear power generation credit zero emission), 48 (Power Credit) or 48A (Advanced Coal Project Credit) for the current or any previous year.
New Clean Energy Investment Credit – IRA § 13702
The IRA introduces a new Clean Electricity Investment Credit (CEIC), which will be codified at Code § 48D. The CEIC is calculated as a percentage of the taxpayer’s investment in (A) property located in facilities with net zero greenhouse gas emissions if the facility is placed in service or expanded after December 31, 2024; or (B) energy storage technology. CEIC-eligible property will also be eligible for reimbursement under Code § 168.
A facility is not eligible for CEIC if the taxpayer has claimed a credit under Code §§ 45 (REPTC), 45J (advanced nuclear power facility credit), 45Q (carbon sequestration credit), 45U (nuclear power generation credit zero emission), 45Y (CEPC), 48 (Energy Credit) or 48A (Advanced Coal Project Credit) for the current or any previous year.
Additional credit for facilities in low-income communities: An additional credit of up to 20 percent of the CEIC may be available if the facility serves a low-income community and the Secretary of the Treasury selects the facility for an “environmental justice capacity allocation.” The eligibility requirements to be selected for this additional credit distribution are the same as the requirements for the solar and wind environmental equity distributions described above for the Code § 48 energy credit.
Important additional requirements and bonuses
Each of the above tax credits is also subject to the following provisions.
Local content bonus (made in America). – the credit will be increased by up to 10 percent if the taxpayer certifies that the steel, iron or industrial product that is a component of the facility was manufactured in the United States.
Energy Community Bonus – the credit will be increased by another 10 percent of the base amount if located in an energy community. Ann Energy community is defined as (i) a CERCLA abandoned industrial site, (ii) an area of significant employment (as determined by the Secretary of the Treasury) associated with coal, oil, or natural gas, or (iii) a census tract (and any adjacent census tracts ) in which a coal mine was closed after 31 December 1991 or a coal-fired generator was decommissioned after 31 December 2009.
Prevailing Pay and Apprenticeship Requirements: To receive the full credit, new facilities that begin construction more than 60 days after federal guidelines are issued under the IRA must pay at least the prevailing wage to all construction workers and include a minimum percentage of apprentices in the construction workforce. Prevailing salary is location specific as defined by 40 USC § 3141 and so on Ann an apprentice is “an individual who is an employee of the contractor or subcontractor and who participates in a registered apprenticeship program as defined in section 3131(e)(3)(B).” Facilities that fail to satisfy prevailing wage and apprenticeship requirements will receive 1/5 of the standard credit rate.