Co-authored by Lynn Mucenski-Keck at Withum

The Inflation Reduction Act (IRA) was signed into law on Aug. 16, 2022 and allocates over 85 percent of the expected total $433 billion in expenditures to energy security and climate change. President Biden’s goal for the United States to reduce economy-wide net greenhouse gas pollution to 50-52 percent of 2005 levels by 2030. It expands the ability to monetize federal income tax credits for both for-profit and nonprofit institutions.

The Inflation Reduction Act is the largest investment in clean energy and climate action to date. This transformative law was estimated to raise $739 billion and invest $433 billion.

INFLATION REDUCTION ACT – ESTIMATED IMPACT

Source: U.S. Senate

TAX CREDIT ELECTIONS

The Internal Revenue Code provides new monetization provisions for nonprofit and for-profit companies, which allows nonprofits a refundable federal tax credit if a direct pay election is available and for-profit entities to sell their federal income tax credits without creating taxable income if a transfer election is available.

Applicable entities (including tax-exempt entities and state or local governments) can make a direct pay election for certain credits. This would effectively treat tax credits as taxes paid on a filed return. An IRS pre-filing registration process is required as a condition to, and prior to, making an elective payment election. The pre-filing registration process must be made in sufficient time to have a valid registration number at the time the tax return is filed.

A transferable credit election is an irrevocable election for a one-time transfer of all or any portion of the credit.

Entities (other than the applicable entities) can either:

1. Use the federal income tax credit to satisfy their own income tax liability (including decreasing estimated tax payments.
2. Sell designated clean energy credits to an unrelated third party for cash.

A transferable credit election requires a pre-filing registration process to be completed in sufficient time to have a valid registration number at the time the tax return is filed. It also requires a transfer election statement that should be attached to the transferee’s tax return for the year in which the transferee takes the eligible credit into account.

*For-profit entities can make a direct pay election for five years prior to Jan 1, 2033

**Source - Withum

EXPERT OBSERVATION: If the Originator of one of these credits is not able to fully utilize the credit to offset their federal income tax liability, they can still get a cash tax benefit by selling all or a portion of the credit to an unrelated third party if certain requirements are met. Alternatively, most credits can be carried back three years and forward 22 years.

HOW IRA CLEAN ENERGY TAX CREDITS ARE APPLIED BY INDUSTRY

* Please note that applicability is generalized and is not meant to be exhaustive

**Source - Withum

MULTI-TIERED CREDIT STRUCTURE

For many of the tax credits, the credit percentage increases are determined based on certain activities:

• whether the prevailing wage and apprenticeship (PWA) requirements are met (as explained below)
• whether the property is placed in a specific location, such as an eligible census tract or energy communities
• whether the domestic content requirements are met

Sufficient records must be preserved and maintained to support the increase in credit percentages due to certain activities. Whether or not an applicable percentage is increased is dependent on the specific requirements identified in the Internal Revenue Code.

Prevailing Wage and Apprenticeships Requirements

• Wage Requirement: The taxpayer must ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the construction, the alteration or repair of an energy project is paid wages at rates no less than the prevailing rates for construction, alteration or repair of a similar character in the locality in which such project is located as most recently determined by the Secretary of Labor for the taxable year in which the energy project is placed in service.

• Apprenticeship Requirements
• Labor Hour Requirement: No less than 12.5 percent for 2023 taxable year (15 percent for 2024 taxable year) of the total labor hours of the construction, alteration or repair work (including such work performed by any contractor or subcontractor) with respect to such facility must be performed by qualified apprentices.
• Ratio Requirement: Project must meet any applicable requirements for apprentice-to-journey-worker ratios according to the Department of Labor or the applicable state apprenticeship agency.
• Participation Requirement: A taxpayer, contractor or subcontractor who employs four or more individuals to perform construction, alteration or repair work with respect to the construction of a qualified facility must employ one or more qualified apprentices to perform such work.

Designated Area Requirements

• An increased Section 48 credit is provided for location in energy communities (i.e., brownfield site, statistical areas, coal closure census tracts)
• Section 30C refueling property credit must be located in an eligible census tract (i.e., not an urban area or low-income community) to claim the credit.

Domestic Content Bonus Requirements

• An increased credit is provided if all manufacturing processes with respect to any steel or iron items take place in the United States, except metallurgical processes involving the refinement of steel additives.
• No less than 40 percent of the total costs of manufactured products of a qualified facility are attributable to manufactured products (including components) that are mined, produced or manufactured in the United States.

EXPERT OBSERVATION: It is critical to invest in designated areas and keep manufacturing processes within the U.S. to maximize the applicable percentage applied to the clean energy credits. Further, all investments and processes should be carefully documented for substantiation purposes.

EXPLORING TAX CREDITS UNDER THE INFLATION REDUCTION ACT

A wide range of credits were expanded, modified or created under the Inflation Reduction Act.

The following content will concentrate on three energy credits applicable to businesses (bolded in the table above for reference).

1. Expanded Credit: Section 48 Clean Energy Investment Credit

This credit generally applies to projects that begin construction before Jan. 1, 2025.

The base benefit is 6 percent of the eligible costs associated with the qualified energy property. However, the credit can be increased to 30 percent if the project meets any of the following criteria:

• The project has a maximum net output of less than 1 megawatt of electrical (as measured in alternating current) or thermal energy.
• Construction on the project began before Jan. 30, 2023.
• The project meets PWA requirements.

Qualified Property: Tangible personal property in respect to which depreciation is allowable that is constructed, reconstructed, erected or acquired by the taxpayer and the original use of which commences with the taxpayer.

Eligible Technologies: Section 48 covers a range of technologies, with a focus on renewable energy and energy-efficient systems. This includes waste energy recovery property, qualified biogas property, qualified fuel cells, energy storage technology, solar energy systems, geothermal systems and combined heat and power (CHP) systems.

For taxpayers who meet any the following criteria, an additional 10 percent can be applied for each bullet point (up to 50 percent):

• Project location is in an energy community.
• Domestic Content Bonus requirements are met.

Safe Harbor: Notice 2018-59 provides two methods for a taxpayer to establish when construction has begun on energy property for purposes of the Section 48 credit: the Physical Work Test and the Five Percent Safe Harbor,

• Under the Physical Work Test, taxpayers may establish that construction has begun by starting physical work of a significant nature, which may include both on-site and off-site work on the property.
• Alternatively, a taxpayer may establish that they qualify for the financial safe harbor (Five Percent Safe Harbor) if the taxpayer pays or incurs 5 percent or more of the total cost of the energy property and makes continuous efforts to advance towards the completion of the energy property.

EXPERT OBSERVATION: Although a taxpayer may satisfy both methods of establishing the beginning of construction, construction will be deemed to have begun on the date the taxpayer first satisfies either of the two methods.

Continuity Safe Harbor: IRS Notice 2022-61 provides for a Continuity Safe Harbor provided a qualified facility is place in service no more than four calendar years after construction began for purposes of Section 48 credit.

EXPERT OBSERVATION: If the construction begins on a facility in January 2024 and the facility is placed in service by Dec. 31, 2027, the facility will be considered to satisfy the Continuity Safe Harbor for purposes of Section 48.

2. New Credit: Section 45W Qualified Commercial Clean Vehicles Credit

This credit generally applies to commercial vehicles acquired after Dec. 31, 2022 and before Jan. 1, 2033. It is generally a refundable credit to organizations.

The benefit is equal to the lesser of the following:

• The incremental cost of a qualified vehicle
• 30 percent of the cost of a vehicle not powered by a gasoline/diesel internal combustion engine or 15 percent in the case of certain plug-in hybrid electric vehicles (PHEVs)

The benefit is limited to $7,500 for vehicles that weigh less than 14,000 pounds and up to $40,000 for all other vehicles.

For the 2023 taxable year, IRS Notice 2023-9 provided that all street vehicles (other than in the case of compact car PHEVs) that have a gross vehicle weight rating of less than 14,000 pounds will be greater than $7,500. Taxpayers were provided similar guidance for the 2024 taxable year in IRS Notice 2024-05.

Qualified Property: To claim this benefit, a qualified commercial clean vehicle must be:

• Made by a qualified manufacturer and acquired for use or lease by the taxpayer (not for resale)
• A motor vehicle under Title II of the Clean Air Act
• Manufactured primarily for use on public streets, roads and highways
• Be propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity of no less than 15 kilowatt-hours (or, in the case of a vehicle that has a gross vehicle weight rating under 14,000 pounds, seven kilowatt-hours)
• Capable of being recharged from an external source of electricity

Refundable Credit: Generally, it is a refundable credit under the direct pay election for nonprofit organizations but cannot be transferred by for-profit entities.

How to Claim the Credit: Partnerships and S corporations can report it on Form 8936-A (Qualified Commercial Clean Vehicle Credit). All other taxpayers can directly report it on Form 3800 (General Business Credit)

3. Section 45L New Energy Efficient Home Credit under

This credit generally applies to eligible contractors who construct energy-efficient homes placed in service in 2023 through the end of 2032. The home must be acquired by a person from the eligible contractor for use as a residence during the taxable year.

The benefit is up to $5,000 tax credit for each energy-efficient dwelling unit.

Qualified Property: A qualified dwelling unit must be located in the United States, must have substantially completed construction after Aug. 8, 2005, and must be one of the following:

• A certified new single-family home that meets certain Energy Star requirements
• A certified manufactured home that meets certain Energy Star requirements
• A certified multifamily home that meets certain Energy Star requirements
• A certified zero energy ready home

Section 13304 of the IRA retroactively extended this credit for qualified new energy-efficient homes acquired before Dec. 31, 2022. If the following energy-saving requirements are met, the applicable credit per dwelling unit will be $500, with the chance to raise the credit to $2,500 if the prevailing wage and apprenticeship requirements are met.

1. The multifamily home must meet the most recent Energy Star Multifamily New Construction National Program Requirements (as in effect on either Jan. 1, 2023 or January 1 of three calendar years before the date the multifamily home is acquired).
2. The multifamily home must meet the most recent Energy Star Multifamily New Construction Regional Program Requirements applicable to the location of such home (as in effect on Jan. 1, 2023, or January 1 of three calendar years before the date the dwelling was acquired, whichever is later).

If the dwelling units instead meet the zero-energy-ready home requirement (such dwelling unit is certified as a zero-energy-ready home under the zero-energy ready home program of the Department of Energy as in effect on Jan. 1, 2023) the applicable credit is $1,000 and raised to $5,000 per dwelling until if the prevailing wage and apprenticeship requirement is met.

For tax years after Dec. 31, 2022, the Section 45L credit can be used in combination with the Section 179D energy-efficient commercial building deduction. In addition, the Section 45L credit will not reduce the basis for purposes of calculating the Section 42 low-income housing tax credit.

CARRYFORWARD AND CARRYBACK

The following credits can be carried back three years and forward 22 years under IRC 39(a)(4)/6417(b):

• Section 30C Alternative Fuel Vehicle Refueling Property Credit
• Section 45(a) Renewable Electricity Production Credit
• Section 45Q(a) Credit for Carbon Oxide Sequestration
• Section 45U(a) Zero Emission Nuclear Power Production Credit
• Section 45V(a) Production of Clean Hydrogen
• Section 45W Qualified Commercial Vehicle Credit
• Section 45X(a) Advance Manufacturing Production Credit
• Section 45Y(a) Clean Electricity Production Credit
• Section 45Z(a) Clean Fuel Production Credit
• Section 48 Energy Credit
• Section 48C Qualifying Advanced Energy Project Credit
• Section 48E Clean Electricity Investment Credit

EXPERT OBSERVATION: The carryback provision is a great benefit for taxpayers to claim a cash refund on taxes paid in a prior period by filing amended tax returns. It provides tax planning opportunities like exploring accelerating income and reducing the expense to claim credits or filing for a refund on taxes already paid.

The above list is not all-inclusive and is provided to demonstrate examples of the broader scope of clean energy credits in the coming years.

For any questions about these credits’ eligibility and how to maximize the cash benefit, please contact GHJ’s Tax Services Practice. By partnering with HLB affiliate firm Withum, GHJ is able to optimize the benefit of these credits on behalf of clients.