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Surveying the landscape of Inflation Reduction Act tax credits

July 21, 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 provides two new options for the monetization of tax credits. One option, involving sales of credits for cash, is especially useful where projected tax credits are likely to outweigh the current and near-term tax liabilities of those generating the credits. In addition, a second option paves the way for a variety of tax-exempt entities to obtain the cash benefit of tax credits in the absence of traditional tax liabilities.

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