In August 2022, the US Congress passed the Inflation Reduction Act (IRA), one of the biggest investments in clean energy technology development in history, and a major step towards reducing the US’ greenhouse gas emissions through technology and innovation. As we approach the 2023 year-end, we can see how the IRA is beginning to unfold and how effected businesses are beginning to respond.
Funding under the IRA includes key provisions that provide substantial tax benefits for clean energy investments. These funding provisions are so impactful that they may provide up to 50% of project costs. These include:
- The Advanced Manufacturing Production Tax Credit. The 45X credit provides a per-unit based tax credit for each domestically produced qualifying clean energy technology unit produced. Qualifying technology includes solar, battery and applicable critical minerals. Applicable critical minerals are defined further in IRC §45X(c)(6) but includes many potential qualified minerals taxpayers should consider.
- The Investment Tax Credit (ITC). The 48C, ITC provides a tax credit for investments in clean energy manufacturing facilities and equipment designed to reduce greenhouse gas emissions by at least 20%.
- The Federal Carbon Capture Tax Credit. The 45Q, CCTC provides a tax credit based on sequestered carbon dioxide per ton. The IRA increased the maximum credit amount for capturing and sequestering carbon oxide from $50 per metric ton to $85 per metric ton (and $180 per metric ton for carbon dioxide captured using direct air capture technology.
- EPACT 179D. Section 179D provides accelerated depreciation for upgrades in HVAC systems, lighting and building envelope. The IRA increased the maximum benefit from $1.80 per square ft. to as much as $5.36 per square foot (sq. ft.) in immediate deductions.
Advanced Manufacturing Production Tax Credit: 45X
The 45X tax credit for solar and wind energy, inverters, batteries, and critical minerals, is a new tax credit introduced through the IRA. Section 45X provides both direct pay and transferability opportunities to monetize the IRC Section 45X credit. Direct pay is available to tax-exempt entities and to certain tax paying entities who elect for direct pay for the first five years after which they file the credit. Taxpayers may also transfer some or all of the credit to an unrelated third party.
Although these unique aspects of the 45X tax credit will go a long way towards stimulating investment, 45X cannot be used in conjunction with 48C. Taxpayers are closely weighing their options when choosing between incentives, and should conduct a cost benefit analysis based on the potential value of each incentive. While the 45X credit is an ongoing annual credit that can be claimed each year based on production expenditures of domestic components or critical minerals sold to an unrelated party, the Section 48C credit provides a one-time credit based on a taxpayer’s investment in a qualifying project. Given these differences, taxpayers should consider current and future cash needs as well.
Investment Tax Credit (ITC): 48C
The IRA provided $10B in funding for investments in clean energy manufacturing facilities and equipment designed to reduce greenhouse gas emissions by at least 20%. This funding was designed for disbursement in two rounds of $4b and $6b each. Guidance was released on May 31st for the first round of funding and included guidelines for concept papers and applications papers.
The deadline to submit concept papers was July 31, 2023. The IRS intends to release guidance towards the end of 2023, which will set deadlines for applications. Documentation will be critical for the application process, as the IRS & Department of Energy award funds to applicants based on project merits and available funding. All applicants will be ranked.
The ITC is particularly interesting based on the level of funding provided. Taxpayers can receive up to 50% of project basis for the design and construction of new facilities that produce clean energy products. The base credit amount is 6%, however, there is an enhancement that provides a 30% rate for taxpayers who meet prevailing union wage standards. The ITC also includes two 10% enhancements, one for projects based in designated energy communities and one for projects that are built with domestically sourced materials.
The IRC expanded the list of eligible property for the credit as well. The expanded categories include investments in energy generating equipment which produce energy from water, equipment that stores energy, grid modernization equipment, property designed to capture or sequester carbon dioxide emissions and equipment designed to refine or blend fuels, chemicals or other products which are renewable or low-carbon and low emission and more.
Federal Carbon Capture Tax Credit: 45Q
The IRA provided several important updates to section 45Q. These include increases to the credit award for carbon captured per ton and provisions for direct pay as well as transferability. The 45Q credit provides a base credit of $17 per Metric Ton of CO2, but can be increased to $85 per ton for facilities that pay prevailing wages during the construction phase and first 12 years of operation and meet registered apprenticeship requirements.
The IRA has also made the 45Q credit much more accessible for small and medium sized businesses by reducing the threshold for required carbon sequestration. For direct air capture facilities, the threshold is reduced from 100,000 metric tons to 1,000; for certain electricity-generating facilities, from 500,000 metric tons to 18,750 metric tons; and for other facilities, from 100,000 metric tons to 12,500 metric tons.
The IRA nearly tripled the value for investments in HVAC and lighting systems, while also expanding accessibility. The IRA revised IRC 179D to enhance the maximum square foot benefit rate from $1.80 to $5.36 per square foot of affected spaces. New construction and project retrofits are both eligible. Tax exempt organizations are eligible, and it includes provisions to expand the opportunity for energy efficient retrofits of older buildings by reducing applicable requirements.
Sec. 179D(d)(3) permits tax-exempt organizations to allocate accelerated deductions to the designer of the property. Tax exempt investors in HVAC and lighting upgrades should be aware of the value of the benefits, so they can negotiate for cost savings with designers.
Older buildings typically had trouble achieving energy reduction requirements of 50%. The IRA reduced the baseline annual energy savings percentage requirements from 50% to 25%, which makes it significantly easier for building owners who previously had difficulty achieving the 50% energy savings threshold.
The IRA expanded accessibility to clean energy tax incentives by including unique provisions that are narrowly tailored to achieving their objectives. It also enhanced benefit rates significantly across the board. Taxpayers investing in clean energy technologies should be pleased with these updates. Contact us to learn how GTM can help evaluate your company’s potential savings.