The Inflation Reduction Act of 2022, the most significant action Congress has taken on clean energy and climate change in U.S. history, was signed into law by President Biden on Aug. 16, 2022. While a main focus of this law is climate policy, many businesses – namely those in the clean tech manufacturing and distribution sectors – stand to reap significant benefits; and here's why.
The $739 billion dollar Inflation Reduction Act (IRA) contains several new environment-related tax credits that specifically address clean tech manufacturing businesses. The objective of the climate portion of the law is to dramatically reduce the level of greenhouse gas in the atmosphere and to mitigate the damage associated with climate change while simultaneously increasing social justice. Therefore, a primary objective of the IRA is to provide tax incentives that invigorate investments in the electrification of America, while reducing or replacing fossil fuel-based electricity generation and transportation fuels with cleaner sources.
While manufacturers and other businesses can directly benefit from the energy efficiency incentive under IRC section 179D, or clean energy generation and energy storage tax credits under the section 48 Investment Tax Credit, manufacturers with facilities where these eligible products and components are made can now also benefit from other tax credits that specifically incentivize the manufacturing of such products.
This express focus on incentivizing specific types of manufacturing and industrial products with the federal tax code is significant. Thus, the IRA not only provides an incentive for manufacturing clean tech equipment and components (under IRC section 45X), but the law also contains other federal income tax credits for the cost of such manufacturing equipment. Now, if you manufacture certain clean tech energy and storage components, including batteries – or even if you're mining lithium or other critical minerals for use in such components – you may be eligible for a federal manufacturing income tax credit on a per unit basis. The types of equipment and components that are eligible under this credit are truly broad, making the opportunity for eligible manufacturers notable. Furthermore, in many cases, the value of the credit allows these new U.S. made products to be cost and price competitive with overseas manufacturing. In addition, because the IRA also contains new domestic content incentives for the end-user of the products, demand and price support is also being incentivized by the IRA.
Another example of this is the separate production and investment credits for the manufacturing, storage, and transportation of hydrogen. Hydrogen is one of the cleanest sources of fuel because when you burn hydrogen in air, the byproduct is clean, pure water. Thus, the IRA is incentivizing the switch from traditionally brown or black fossil fuel-based power sources to sources that will be using hydrogen, whether it’s for use as a fuel with fuel-cell technology, or for hydrogen-powered transportation, the direct manufacturing of hydrogen itself now has credits available through the IRA. The details are contained in sections 45V and section 48(a)(15) of the tax code, respectively, either for the production of green-hydrogen or for electrolyzers used in producing hydrogen.
Another example of a manufacturing credit is Internal Revenue Code section 48C, which is an investment tax credit allowing a 30% federal investment credit for clean tech manufacturing equipment. For instance, suppose you have a solar panel manufacturing facility and you buy a piece of equipment that is part of the production function of making that solar panel. In that case, you could be eligible for this tax credit. Furthermore, the types of equipment and related manufacturing that qualify for 48C is quite broad.
To receive the Qualifying Advanced Energy Project Credit a portion of the project must be pre-certified by the IRS in conjunction with the Department of Energy. Taxpayers must pre-apply and then will be allocated an allotment of credit by the IRS before being eligible to claim such credits. The credits are federal income tax credits and are only available after the equipment has been placed in service for use in a trade or business. To be clear, this is not a grant or an advanced funding mechanism. However, a qualifying advanced energy project does not include any portion of a project to produce any property used in refining or blending any transportation fuel other than renewable fuels. To determine the amount of qualified investment for purposes of the qualifying advanced energy project credit, the eligible property is any property which is necessary for:
- The production or recycling of property including any property that re-equips, expands, or established an industrial or manufacturing facility for the production or recycling of renewable resources
- Re-equipping an industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at least 20%
- Re-equipping, expanding, or establishing an industrial facility for the processing, refining, or recycling of critical materials
On Feb. 13, 2023, the IRS released initial guidance on applying for the 48C credit in the form of IRS Notice 2023-18. To apply for certification under this subsection, you will have two years from the date of acceptance by IRS to provide evidence that the certification requirements have been met. Then an applicant who receives a certification has two years from its date of issue to place the project in service. The certification will be valid if the project is in service by that time. The credit allocation amount from any certification revoked under this rule shall be added to the $10 billion pool of available credits under Code Sec. 48C. In addition, should the IRS determine that an applicant who received a certification has placed the project in service at a location that is materially different from the location specified in the application for the project, the certification will also be invalid.
In addition, one other change made by the IRA is the ability to actually sell many of the new climate and energy related tax credits for cash. Once you qualify for these tax credits, some, but not all of them, can be sold, thus serving as a means for recovering your investment or manufacturing cost. While the rules have limits, this new flexibility can make the manufacturing of clean energy, or related products, more competitive when compared to offshore manufacturing. In cases where the business has little or no tax liability, greater tax efficiency can be realized. Plus, such sales are tax free to the seller of the credits.
Clearly, with any new tax law comes some tax complexity, but CohnReznick is here to assist with the required tax planning, modelling, and consulting.
All in all, the Inflation Reduction Act provides $739 billion worth of federal incentives for the country's electrification. While we are just at the very beginnings of such sweeping legislation, manufacturers can make a significant impact by providing an aggressive response to this new mode of economic and ecological reform.