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Surveying the landscape of Inflation Reduction Act tax credits

July 14, 2023 / 32 min read

The Inflation Reduction Act’s primary focus is a collection of climate and energy incentives supporting domestic clean and renewable energy production. Here are some of the most important opportunities available via the tax credits and incentives.

Significant legislation was enacted in 2021 and 2022 that has dramatically expanded the available tax credits, tax incentives, and other funding opportunities related to the green energy sector. Several of these are built on previously existing programs, but many are new and widely applicable. The breadth of qualifying activities is significant, including the production of electricity; production of solar, wind, and energy equipment; installation of energy-efficient upgrades to businesses and homes; and the acquisition of electric vehicles (EVs) and charging equipment. Going further, new monetization options open the benefits of qualifying activities to nonprofits, governments, and other organizations that are tax-exempt. This vast array of new and enhanced options creates opportunities for almost all taxpayers and organizations. Here are some of the most important opportunities for you to consider.

How did we get here? Overview of recent legislation

Considerable attention was paid to tax legislation in recent years, with numerous seismic changes proposed. Ultimately, the core tax rules relating to the corporate tax rate, capital gain tax rate, trusts, and estate and gift taxation were left largely intact. However, numerous tax opportunities now exist due to one core bill and two related bills. These opportunities may be especially attractive to businesses that are managing the impact of new capitalization rules for research and development expenses or those seeking to achieve a variety of environmental, social, and governance (ESG) goals.

The Inflation Reduction Act of 2022 (IRA) was signed into law on Aug. 16, 2022, as the culmination of more than a year of negotiations among members of the Democratic Party. The vast majority of tax increases proposed in the Build Back Better Act were excluded, so the primary focus of the IRA is a collection of climate and energy incentives intended to support domestic clean and renewable energy production. The tax credits and incentives included in the IRA generally took effect at the beginning of 2023. Beyond tax programs, the Department of Energy (DOE) was also provided with over $100 billion in funding to advance expansive grant and loan programs. The combination of tax incentives and broader funding are expected to spur adoption of new technology and equipment while shaping the broader supply chain.

Two other bills that were enacted in 2021 and 2022 on a bipartisan basis have some degree of overlap with the IRA. Those were the CHIPS and Science Act of 2022 (CHIPS Act) and the Infrastructure Investment and Jobs Act of 2021, (Infrastructure Act). The CHIPS Act provides a combination of tax incentives and funding to support the domestic semiconductor industry, which is much more targeted than the IRA but fits within the broader push for domestic manufacturing. The Infrastructure Act funds infrastructure improvements across the United States (bridges, roads, airports, ports, etc.) while also paving the way for improvements that support IRA programs (electric transmission, EV charging network, and pipelines for captured carbon, among others).

Key topics and categories of the Inflation Reduction Act

Below is a detailed breakdown of the tax credits and incentives included in the IRA:

How to benefit? New and enhanced monetization options

The IRA created two new monetization options that are expected to drive greater interest in the enhanced tax credits. Those options are responsive to two potential challenges. First, the breadth and significance of IRA credit opportunities could naturally result in the accumulation of excess credits by taxpayers with limited ability for their use in the near term. Second, tax credits offset income tax liabilities, so entities that are generally not subject to tax might not be able to benefit from these opportunities. As outlined below, there are now multiple paths for taxpayers to generate cash benefits from qualifying activities. (Please see the table at the end of this article, which describes the monetization options available for each of the tax credits.)

The IRS and Treasury Department released initial guidance related to the transferability and direct pay monetization options in mid-June 2023. That guidance includes a new set of frequently asked questions, proposed regulations for transferability and direct pay for IRA-related credits, proposed regulations for direct pay of the semiconductor credit from the CHIPS Act, and temporary regulations implementing a pre-filing registration program. Additional guidance is expected as the 2023 calendar year advances and will formalize the monetization options and procedures.

Credit computations: Baseline, 5x multiplier, and bonus options

The majority of enhanced tax credits and incentives include multiple levels of benefits depending on whether certain requirements are satisfied. There are four core concepts applicable to many of the tiered computations:

Tax credits for manufacturers

Manufacturers have three predominant credit options based on the IRA and the CHIPS Act:

Electricity production from renewable and clean resources

Multiple tax credits are generated by the production of electricity from specific resources. In this context, taxpayers have the choice of either claiming an investment tax credit calculated based on the cost of installing the equipment or a production tax credit calculated based on the annual amount of electricity produced. The IRA expanded the two previously existing credits and added two new credits with delayed effective dates. The current and future credits are largely similar, but the specific rules will change depending on the year in which qualifying equipment is placed in service.

The Sec. 45 credit is generally equal to 0.3 cents per kW hour of electricity, but this is increased to 1.5 cents per kW if either: (1) the facility has a maximum net output of less than 1 megawatt (mW) (alternating current), (2) the prevailing wage and apprenticeship requirements are satisfied, or (3) construction began before Jan. 29, 2023. The credit can also be increased by increments of 10% of the calculated amount if the domestic content requirements are satisfied or the facility is located in an energy community.

The Sec. 48 credit is initially equal to 6% of the basis of qualifying energy property, but this is increased to 30% if either: (1) the facility has a maximum net output of less than 1 mW of electrical (alternating current) or thermal energy, (2) the prevailing wage and apprenticeship requirements are satisfied, or (3) construction began before Jan. 29, 2023. That credit percentage can be increased by additional 10% increments if domestic content rules are satisfied, or the project is placed in an energy community. Additional bonus credits (10 or 20% increments) are available to solar and wind facilities that are placed in service of a low-income community under Sec. 45(d)(1), on Indian land, as part of a low-income residential building project, or as part of a qualified low-income economic benefit project. However, such low-income bonus credits require an advanced application and a resulting allocation of environmental justice solar and wind capacity limitation. Taken together, the spectrum of potential tax credits could range from 6 to 70% of the eligible basis, subject to several specific details.

The base credit amount is 0.3 cents per kW of electricity but is increased to 1.5 cents if the facility either: (1) has a maximum net output of less than 1 mW (alternating current), or (2) satisfies the prevailing wage and apprenticeship hour requirements. Those credit amounts are subject to inflation-based adjustments in future years. This credit is also subject to a four-year phase down beginning the first calendar year after the later of the year in which greenhouse gas emissions from electricity production are 25% of the 2022 level or 2032.

Similar to the Sec. 48 credit, the base percentage for the Sec. 48E credit is 6% but is increased to 30% if either: (1) the facility has a maximum net output of less than 1 mW of electrical (alternating current) energy, or (2) the prevailing wage and apprenticeship requirements are satisfied. Additional 10% bonus increments are available if the facility is located within an energy community or the domestic content requirements are satisfied. Finally, additional credit allocations of 10% and 20% are available for facilities placed in service in connection with low-income communities. Such credit allocations are obtained through an application process similar to the one under Sec. 48.

Clean vehicles and refueling equipment

New and enhanced credits are available for the acquisition of clean vehicles and refueling property. Key details are embedded in these rules, but these are generally aimed at providing incentives for businesses and individuals to adopt electric vehicles and fuel cell vehicles (FCVs). To this end, the IRA modified two existing credits and added two new credits:

The expanded credit amount is made up of two components equaling up to $3,750 each, for a total maximum of $7,500 per credit. This is also subject to an income-based phase out. One component (the critical mineral requirement), is satisfied if a threshold percentage of critical minerals used in the battery were either: (1) recycled in North America; or (2) extracted or processed in either the United States or any country with which the United States has a free trade agreement. The second component (the battery components requirement) is satisfied if the value of battery components that were manufactured or assembled in North America equals or exceeds a phased in percentage. The credit is also subject to a full phase-out if the modified adjusted gross income (MAGI) of the taxpayer exceeds $300,000 for joint filers, $225,000 for heads of households, and $150,000 for all other filers. The taxpayer may apply the lower of the MAGI for the year in which the vehicle is placed in service or the MAGI for the prior year.

The credit amount is equal to the lesser of 30% of the sales price or $4,000. However, the credit is phased out for taxpayers with MAGI in excess of: $150,000 for joint filers, $112,500 for heads of households, and $75,000 for all other filers. Importantly, taxpayers can use the lower MAGI from either the year of the purchase or the prior tax year.

Energy-efficient upgrades and construction

The IRA includes additional tax incentives focused on energy-efficient upgrades to commercial buildings as well as the construction of new energy-efficient homes. These programs previously existed but were expanded and modified significantly. While these are both tax incentives, one takes the form of accelerated depreciation, and the other is a production tax credit.

Organizations exempt from tax are generally unable to benefit from enhanced tax deductions. However, the Sec. 179D program allows certain tax-exempt organizations to allocate the deduction to the person primarily responsible for designing the property. This is available with respect to: (1) tax-exempt organizations; (2) the United States, any state or political subdivision of the state, any possession of the United States, or any agency or instrumentality of those governments; and (3) an Indian tribal government or an Alaska Native Corporation. Please note that this is a different list of tax-exempt organizations from the list of applicable entities under Sec. 6417.

The guidance in Notice 2022-61, referenced above with respect to the prevailing wage and apprenticeship requirements for purposes of Sec. 48, also applies (and is the only guidance available as of July 14, 2023) for determining the prevailing wage requirements under Sec. 45L. As mentioned above, while the new Sec. 6418 allows for the transfer of a variety of tax credits from one taxpayer to another, the Sec. 45L credit is not one of those credits — meaning that the Sec. 45L credit remains nontransferable. The credit can only be claimed by an “eligible contractor” on the qualified energy-efficient property when the qualified energy-efficient property is acquired from the eligible contractor by another party.

Residential energy property

These credits are discussed in greater depth in our article focused on credit opportunities for individuals, but here is a summary of those programs:

Credit for carbon oxide sequestration

The carbon oxide sequestration credit has been available pursuant to Sec. 45Q since 2008 but was significantly modified by the IRA. This generally requires the capture of carbon by a qualified facility and the use or storage of such captured carbon. The capture and disposal, use, or utilization must occur within the United States or a possession of the United States. The term “qualified facility” means an industrial facility or direct air capture facility, which either: (1) is a direct air capture facility capturing not less than 1,000 metric tons of qualified carbon dioxide during the tax year; (2) is an electricity generating facility that captures not less than 18,750 metric tons of qualified carbon dioxide during the tax year and for which the design has a capture capacity of at least 75% of the baseline carbon dioxide production of the unit; or (3) is any other type of facility that captures not less than 12,500 metric tons of carbon dioxide during the tax year. Construction of a qualified facility must generally begin before Jan. 1, 2033. Additionally, a qualified facility that claims Sec. 45Q credits is ineligible for credits under Sec. 48C, Sec. 48E, Sec. 45V, Sec. 45Y, and Sec. 45Z.

The credit amount is calculated as a stated amount per metric ton of qualified carbon oxide that is captured. However, the amounts vary widely depending on when the equipment is placed in service, the type of facility involved, and the method of storing, using, or otherwise using the captured amounts. Prevailing wage and apprenticeship hour requirements also apply for purposes of Sec. 45Q and multiply credit amounts by five. This is another favored credit, for which taxable entities are eligible for direct pay monetization under Sec. 6417 for a period of five years.

Fuel production and use credits

A combination of new and modified tax credits relates to the production and use of certain fuels. This is another situation where modified credits apply to the first years after enactment of the IRA but are then replaced by a new tax credit in the future.

Monetization options available for each of the tax credits

Table showing manufacturing and electricity credits for the IRA.

Table showcasing different parts of the Inflation Reduction Act. 

Table showcasing different parts of the Inflation Reduction Act.

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