As part of the Biden administration’s efforts to incentivize the use of clean energy technologies, the Inflation Reduction Act of 2022 (“IRA”) contains enhancements to several existing federal tax credits, as well as several completely new provisions. One existing credit provision with enhancements is Section 48.
Section 48 of the Internal Revenue Code, entitled “Energy Credit,” provides taxpayers with a federal income tax credit for a percentage of the cost of placing specified energy property into service. The credit percentage rate can be as high as 70 percent, depending on a variety of factors, including:
- The type of energy property involved,
- Whether new prevailing wage and apprenticeship requirements are met,
- Whether the project is located in a low-income community or on tribal lands,
- Whether domestic content requirements are met, and
- Whether the project is located in an Energy Community
The credit is claimed using IRS Form 3468.
While solar may be the most widely recognized property qualifying for Section 48, the credit applies to other specified energy property. It also applies to a separate group of energy properties otherwise eligible for the Section 45 production tax credit that have made an irrevocable election to be treated as energy property for purposes of Section 48.
Specified Energy Property
The property must be constructed, reconstructed, or erected by the taxpayer. However, interestingly, the property can still be eligible if acquired by the taxpayer so long as the taxpayer is the original user of the property.
Several types of energy property are eligible for the Section 48 credit:
- Any equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat. Solar-heated swimming pool equipment is specifically excluded from the definition of “energy property.”
- Equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, or electrochromic glass that uses electricity to change its light transmittance properties in order to heat or cool a structure
- Equipment used to produce, distribute, or use energy derived from a geothermal deposit
- Qualified fuel cell property or qualified microturbine property
- Combined heat and power system property
- Qualified small wind energy property
- Equipment that uses the ground or ground water as a thermal energy source to heat a structure or as a thermal heat sink to cool a structure
- Waste energy recovery property (placed in service after 12/31/2022)
- Energy storage property (placed in service after 12/31/2022)
- Qualified biogas property (placed in service after 12/31/2022)
- Microgrid controllers (placed in service after 12/31/2022)
Important note: With one exception, construction must begin for the aforementioned energy properties before January 1, 2025. Construction must begin before January 1, 2035, for equipment using ground water as a thermal energy source. Notice 2018-59 contains the rules for determining when the beginning of construction is deemed to occur for purposes of the Section 48 credit.
Energy Credit Percentage
The IRA has established a two-tier credit percentage structure. The base credit percentage, in most cases, is 6 percent of the basis of energy property placed in service during the tax year.
The credit percentage can increase significantly depending on the location of the facility and whether specific employment conditions are met.
Credit percentage increase to 30 percent
The energy credit percentage will increase fivefold to 30 percent if any one of the following conditions are met:
- The project has a maximum net output of less than 1 megawatt of electrical or thermal energy;
- The construction of the project begins less than 60 days after the IRS issues guidance about the prevailing wage and apprenticeship requirements (this 60-day window closed January 29, 2023);
- The taxpayer complies with applicable prevailing wage and apprenticeship requirements.
Please click the link for recent Elliott Davis guidance regarding the prevailing wage and apprenticeship requirements:
Certain solar and wind facilities can qualify for an additional 10 percent credit if the facility is in a low-income community or on Native American land. The facility must be either qualified wind property, solar property, or small wind energy property. The maximum net output of the facility must be less than 5 megawatts.
If the facility is part of a qualified low-income residential building project or a qualified low-income economic benefit project, the additional credit is 20 percent instead of the 10 percent noted in the previous paragraph.
This additional credit is capped at a total of 1.8 GW for all taxpayers, and once this limit is reached the credits will be allocated amongst taxpayers.
Bonus credit for meeting domestic content requirements
If 100 percent of the steel or iron used for a project facility and 40 percent of the manufactured products that are components of the facility are produced in the United States, then the domestic contents requirements are met. For facilities of less than 1 MW that meet this requirement, a bonus 10 percent credit is available. If a project is more than 1 MW, it must meet the prevailing wage and apprenticeship requirements to receive the additional 10 percent credit. Otherwise, the additional credit is 2 percent.
Bonus credit if facility located in Energy Community
Additional bonus credits up to 10 percent can be claimed if a project is located in an “Energy Community.” Three types of geographies can be considered energy communities for these purposes: brownfields; coal communities; and areas with significant employment or tax revenue from the fossil fuel industry that also has significant recent unemployment. Note that certain states (e.g., South Carolina) also provide state-level credits for facilities located in brownfield geographies.
Similar to the domestic content percentages, the bonus energy community percentage is 10 percent for projects of less than 1 MW and projects of more than 1 MW meeting the prevailing wage and apprenticeship rules. For large projects not meeting the wage and apprenticeship requirements, the additional credit is 2 percent.
For help navigating these available credits or if you have questions, please reach out to a member of our team.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.