On July 27, 2022, Senate Majority Leader, Chuck Schumer, and Senator Joe Manchin announced an agreement on a Senate reconciliation bill called the Inflation Reduction Act of 2022 (H.R. 5376) and on Aug. 16, 2022, it was signed into law by President Joe Biden. The legislation includes $369 billion in climate and energy provisions and is the largest-ever U.S. investment in climate response. 

The bill is designed to accelerate the buildout of renewable energy and electric vehicles (EVs) as well as boost the deployment of nuclear energy and increase domestic clean energy related to manufacturing and advanced energy technologies (such as storage, carbon capture, and green hydrogen). The bill also incentivizes clean energy investments in both low-income and minority communities. It is simultaneously an energy policy act and a significant tax policy bill, including a “pay-for” proposal that would impose a new 15% corporate minimum tax regime on large taxpayers (please note that this provision may potentially change based on recent negotiations). There are also a number of provisions for fossil fuels and traditional energy sectors that are part of the compromise struck with Senator Manchin.

In keeping with U.S. legislative history, the  bill uses the federal tax code as a clean energy policy strategy. Specifically, the bill includes both extended and expanded Investment (ITC) as well as Production (PTC) tax credits.

Summary of tax incentives

Below is a summary of just a few of the tax incentives in the legislation, according to the U.S. Senate Finance Committee’s original bill text:

The legislation both extends the existing § 45 PTC and the § 48 ITC for a brief period (for projects that commence construction by Dec. 31, 2024), then transitions both § 45 and § 48 into new replacement tax code sections; one to be called, “The Clean Electricity Production Credit,” under new Internal Revenue Code § 45Y and the other to be called, “The Clean Electricity Investment Credit,” under new Internal Revenue Code § 48D.

When they become effective the §45Y/48D provisions will become an emissions-based tax incentive that would be neutral and flexible as between clean electricity technologies. 

Tax-exempt payers will have a similar ability to elect direct pay for the clean electricity PTC and ITC as they would under the  amendments to § 45 and § 48.

Taxpayers electing the new § 45Y PTC would receive a PTC up to 2.5 cents (note that the PTC is annually indexed for inflation) per kilowatt hour (KWh) of electricity produced and sold in the 10-year period after a qualifying facility is placed in service, according to the U.S. Senate Finance Committee.

Taxpayers electing the § 48D ITC will receive a credit worth up to 30% of the investment in the year the facility is placed in service. 

Under § 45Y and § 48D, taxpayers are eligible for either a PTC or 0.3 cents per kWh, or an ITC of 6% with taxpayers who pay local prevailing rates and utilize registered apprenticeship programs being eligible to receive elevated credits of 1.5 cents per kilowatt hour or 30% ITC (note that the PTC is annually indexed for inflation). 

The prevailing wage and apprenticeship provisions will apply in the same manner to new § 45Y and § 48D as they do for the amendments to the § 45 (PTC) and the § 48 (ITC).

Also, any facility described in the new clean electricity production credit, and any qualified property or grid improvement property described in the clean electricity investment credit, will be treated as five-year property under the General Depreciation System for tax purposes of IRC Section 168, according to the U.S. Senate Finance Committee.

This expanded depreciation provision shall apply to facilities and property placed in service after Dec. 31, 2024.

PTC § 45 – If construction commences by Dec. 31, 2024, the bill would extend the commence construction deadline from prior Jan. 1, 2022, to before Jan. 1, 2025.

The proposal re-establishes the 100% PTC for projects placed in service after 2021 and eliminated the phaseout for offshore wind under the ITC.  

There is a base credit rate of 0.3 cents per kWh, inflation indexed as before, but the credit is multiplied by five (i.e., 1.5 cents) if new prevailing wage and apprenticeship requirements are met. Increases above the base credit are referred to as “bonus” credits. 

According to the provision, these labor rules are effective only for projects commencing construction 60 days after the U.S. Treasury publishes such guidance:

A qualified facility can be eligible for the bonus credit even if it does not meet the prevailing-wage and apprenticeship requirements provided construction of the facility begins prior to 60 days after the secretary of labor publishes guidance with respect to the wage and apprenticeship requirements – or if the facility has a maximum net output of less than one megawatt.

The tax credit value is increased by an additional 10% if the facilities also meet domestic-content requirements.

The credit value is further increased by 10% for projects in energy communities, including certain brownfield sites under CERCLA and, for example, where a coal mine has closed, where a coal-fired electric generating unit has been retired, or an immediately adjacent census tract.

These additional increases are stackable and can lead to substantial credit percentages above the baseline credit rate.

ITC § 48 - If construction commences by Dec. 31, 2024 the bill would extend the commence construction deadline one more year from before 2024 to before 2025. 

The bill would increase the ITC to 30% for solar, fuel cells, and small wind facilities in service after 2021.

The new bill also creates a new “stand-alone” storage ITC for certain biogas, linear generators, thermal storage, microgrid, and dynamic glass technology.

The credit value is increased if the facilities meet domestic-content requirements.

The credit value is also increased for projects in energy communities, including certain brownfield sites under CERCLA as well as where a coal mine has closed, a coal-fired electric generating unit has been retired, or an immediately adjacent census tract, for example.

Safe Harbor Rules

While not fully clear as of this writing, the reliance on “construction commence” language throughout the proposal indicates continued access to the 5% safe-harbor and/or the physical work methods of determining applicable statutory starting dates. Details of transition rules between pre-act § 45 and § 48 commence construction, post-act pre-45Y/48D rules, and the final 45Y and 48D rules are yet to be clarified.

We expect the IRS to clarify these rules following enactment into law of the new proposals.

Carryback period

The credit carryback period is extended from one to three years for any credit eligible to be transferred, according to the provision.

Credit monetization

There are two new tax rules that are part of the current proposal. One, “elective pay”, and two, transferable credits. It should be noted that while both of these rules (explained in more detail below) may, in some ways, resemble the old, long expired § 1603 treasury grant program, neither the “direct pay” nor the tax credit transferability rules constitute a “grant” for federal tax purposes.

Accordingly, the elective payment is actually a refundable tax credit and the transferability rules are a mechanism for selling tax credits for cash paid to the seller by the tax credit purchaser.

The U.S. Senate Finance Committee states that the elective payment provision allows eligible taxpayers to elect to be treated as having made a payment of federal tax equal to the value of the credit they would otherwise be eligible for under: 

• Section 48 ITC 
• Section 45 PTC 
• Section 45Q credit for carbon capture and sequestration 
• Section 30C alternative fuel vehicle refueling property credit 
• Section 48C advanced energy project credit 
• Section 45U zero-emission nuclear power production credit 
• Section 45V clean hydrogen production credit 
• Section 45X advanced manufacturing production credit 
• Section 45Y clean electricity production credit 
• Section 48D clean electricity investment credit 
• Section 45Z clean fuel production credit 

Under this provision, taxpayers can elect to treat the amount of certain specific credits as a prior payment of tax. This then allows entities with little or no tax liability to accelerate utilization of these credits, including tax-exempt and Tribal entities. 

The U.S. Senate Finance Committee also states that eligible taxpayers include, and are limited to:

• Tax-exempt entities 
• State and local governments (and subdivisions)
• Certain Tribal governments, and
• The Tennessee Valley Authority

However, this limitation on eligible taxpayers does not apply for taxpayers claiming credits under section 45Q, 45V, or 45X who may generally opt for direct pay. Yet for purposes of credits under section 45X, this exception is limited to a single period of five consecutive years.

The applicable percentage for facilities which satisfy domestic content requirements and facilities with a maximum net output of less than one megawatt shall be 100%, according to U.S. Senate Finance Committee.

This provision applies to taxable years beginning after Dec. 31, 2022.

REITs – Direct pay

This provision provides that, in the case of a real estate investment trust (REIT), the requirements limiting qualified investment to the REIT’s ratable share of such qualified investment does not apply.

In the case of a facility placed in service after Dec. 31, 2022, for which a credit is allowed under the § 48 ITC, § 45 PTC, § 45Y clean electricity PTC, or 48D clean electricity ITC, the amount of payment allowed under this provision shall be equal to the amount of credit the taxpayer would otherwise be eligible with respect to such facility multiplied by the applicable percentage, as defined under  §§  45 and 45Y.

Transferability

See “Direct Pay” Separately Above for Tax Exempt Situations

After 180 days following the enactment of the Inflation Reduction Act, taxpayers who are ineligible for the direct pay election (see above) may instead opt to transfer any applicable credit to an unrelated taxpayer. 

Tax credit carryovers cannot be transferred, the U.S. Senate Finance Committee said, and this transfer may be for all, or a portion of, a credit, but any credit (or portion thereof) may only be transferred once.

The U.S. Senate Finance Committee said that credits eligible to be transferred include:

• Section 30C alternative fuel refueling property credit 
• Section 45 renewable electricity production credit
• Section 45Q credit for carbon oxide sequestration 
• Section 45U zero-emission nuclear power credit 
• Section 45V clean hydrogen production credit 
• Section 45X advanced manufacturing production credit 
• Section 45Y clean electricity production credit 
• Section 48 energy investment tax credit 
• Section 48C advanced energy project credit 
• Section 48D clean electricity investment credit 

Any amount paid in consideration of a transfer must be paid in cash, according to U.S. Senate Finance Committee. This payment for any credit is not deductible by the purchaser nor is the payment included in income of the seller. It’s unclear if the purchaser is taxed on their use of the credit.

For the multi-year credits under §§ 45, 45Q, 45V, and 45Y, transfers must be made separately for each year of the credit’s relevant credit period.

Any election to transfer credits by a partnership or S corporation must be made at the entity level and is not allowed at the partner or shareholder level, the U.S. Senate Finance Committee said.

The IRS is granted authority to request such information or require such information reporting by taxpayers as is necessary to prevent fraud and improper payments and IRS is expected to publish rules pertaining to the transfer.

45Q carbon oxide sequestration

The bill extends § 45Q 10 years for qualified facilities that commence construction before Jan. 1, 2033.

Under the bill, minimum capture requirements are modified. 

Electricity generating facilities must capture at least 18,750 metric tons of carbon oxide and 75% of the baseline carbon emissions from each generating unit with carbon capture equipment installed on it. 

Direct air capture facilities must capture at least 1,000 metric tons/year while other facilities must capture at least 12,500 metric tons of carbon oxide. 

New baseline calculation rules are provided. However, the credit amount is multiplied by five if a facility meets the prevailing wage and apprenticeship requirements under the bill, but the labor requirements are not applicable to projects beginning construction prior to 60 days after Treasury publishes guidance on the labor requirements.

The credit is: 

• Geological storage: $17 per metric ton for carbon captured and sequestered, or a bonus credit of $85 per metric ton of carbon oxide captured and sequestered in geological storage. 
• Tertiary injectant: $12 per metric ton for carbon captured and used, or a bonus credit of $60 per metric ton for a carbon oxide captured and utilized in oil recovery (or for a commercial use that results in permanent sequestration). 
• Direct air capture: $36 per metric ton or a bonus credit of $180 per metric ton of carbon oxide captured for geological storage. 
• Allowable use: $26 per metric ton for direct air captured and used as a tertiary injectant. or a bonus rate of $130 per metric ton of carbon captured and utilized by the taxpayer.

Contact

Anton Cohen, CPA, Partner, Renewable Energy Industry Leader, CohnReznick

301.652.9100

Joel Cohn, CPA, Partner, Value360 – Project Finance & Consulting, CohnReznick

410.895.7820

Lee Peterson, JD, Senior Manager, Value360 – Project Finance & Consulting, CohnReznick

404.847.7744

Sasibeh Beyene, CPA, Partner, Renewable Energy Practice, CohnReznick

301.280.3766