Clean Energy Details from the Inflation Reduction Act
Subtitle D of the Inflation Reduction Act (IRA) is dedicated to energy security within the United States. One of the main ways that Congress intends to achieve this goal is by providing incentives to taxpayers to invest in, produce, and use cleaner energy from electricity to fuel and technologies to achieving efficiencies.
This article provides a detailed breakdown of the numerous tax credits included in the energy security subtitle of the Act.
Clean Electricity and Reducing Carbon Emissions
|Credit for Electricity Produced from Certain Renewable Sources|
|Construction beginning before||1/1/2022||1/1/2025||1/1/22|
|Prevailing wage & apprenticeship requirements||No||Yes||1/1/22|
|Domestic content||n/a||Additional 10%||1/1/2023|
|Energy community||n/a||Additional 10%||1/1/2023|
|Energy Credit||PIS before 1/1/2022||PIS before 1/1/2025||1/1/2022|
|Geothermal energy property||n/a||30% credit||1/1/2022|
|Energy storage technology, qualified biogas property, and microgrid controllers||n/a||10% credit||1/1/2023|
|Prevailing wage & apprenticeship requirements||No||Yes||1/1/2022|
|Solar and Wind Facilities Placed in Service in Connection with Low-Income Communities|
|Low-income residential building project or economic benefit project||n/a||10%||1/1/2023|
|Credit for Carbon Oxide Sequestration|
|Prevailing wage & apprenticeship requirements||No||Yes||12/31/2022|
|Zero-Emission Nuclear Power Production Credit|
|Credit rate||n/a||$0.015/kWh||12/31/2023 – 12/31/2032|
Credit for Electricity Produced from Certain Renewable Sources
The IRA extends and modifies the credit for electricity produced from certain renewable sources. It extends the timeline for beginning construction of a wind, solar, or geothermal facility that produces renewable electricity, making it eligible as a “qualified facility” for purposes of the Section 45 renewable resources credit. The credit amount ($.015 per kilowatt hour) remains the same. However, the Act also adds prevailing wage and apprenticeship requirements to the qualified facility provision, which, if not met, reduces the credit amount to $0.003 per kilowatt hour.
The prevailing wage requirement requires any laborer or mechanic employed by the taxpayer, contractor, or subcontractor in constructing the facility be paid at least the local prevailing rates for such work. The apprenticeship requirement requires that a certain number of individuals who are participating in a registered apprenticeship program must be working on the facility.
The credit is increased if the steel, iron, or manufactured product that is a component of the facility was produced in the United States. Moreover, the credit is also increased if the facility is located in an “energy community.”
The IRA also extends the timeline for certain property to qualify for the Section 48 Energy Credit and imposes the prevailing wage and apprenticeship requirements to qualify for an increased credit. Moreover, the Act reduces the base credit rates described in the section from 30% to 6% and from 10% to 2%, respectively; however, it does provide that those prior credit rates would continue to apply for qualifying energy projects that abide by the new prevailing wage and apprenticeship requirements.
Further, the provision adds geothermal energy property to the 6%/30% credit list and energy storage technology, qualified biogas property, and microgrid controllers (all property for which construction must begin before December 31, 2024) to the 2%/10% credit list.
Solar and Wind Facilities Placed in Service in Connection with Low-Income Communities
Section 48 is further enhanced with a new subsection that provides an increased credit of an extra 10% for solar and wind facilities placed in service in a low-income community. It also provides for an additional 10% (total of 20% extra) if the facility is part of a low-income residential building project or economic benefit project.
Extension and Modification of Credit for Carbon Oxide Sequestration
The credit for carbon oxide sequestration is extended for an additional 7 years by including property for which construction begins before January 1, 2033.
Zero-Emission Nuclear Power Production Credit
The Act creates a new zero-emission nuclear power production credit which is equal to $0.015 multiplied by the kilowatt hours of electricity produced and sold by a qualified nuclear power facility.
|Alternative fuels||PIS before 1/1/2023||Produced before 1/1/2025||1/1/2022|
|Second generation biofuel||Produced before 1/1/2022||Produced before 1/1/2025||1/1/2022|
|Prevailing wage & apprenticeship requirements||No||Yes||1/1/2022|
|Sustainable Aviation Fuel Credit|
|Credit amount||n/a||$1.25||1/1/2023 – 12/31/2024|
|Gross income inclusion||n/a||Yes||1/1/2023|
|Clean Hydrogen Credit|
|Prevailing wage & apprenticeship requirements||No||Yes||1/1/2023|
The IRS also incentivizes the investment in alternative fuels such as alcohol fuel mixture, biodiesel mixture, and other alternatives by extending the termination date of credits for such fuels until December 31, 2024. It also extends the credit for second generation biofuel to such fuel that is produced before January 1, 2025.
Sustainable Aviation Fuel Credit
An entirely new credit has been created for sustainable aviation fuel produced, sold, and transferred in the United States. The credit is equal to $1.25 per gallon of sustainable aviation fuel in a fuel mixture that is produced and sold.
Clean Hydrogen Credit
The Act contains a credit located in new Section 45V for the production of clean hydrogen during the ten-year period following the date a qualified hydrogen production facilities was placed in service. The credit is equal to the kilograms of qualified clean hydrogen produced by the taxpayer at a qualified clean hydrogen production facility multiplied by a certain percentage of $0.60—the percentage depends on the emissions rate of the production. Following the other credits, the credit is increased by a multiple of 5 if the prevailing wage and apprenticeship requirements are maintained.
Clean Energy and Efficiency Incentives
|Energy Efficient Home Improvement Credit|
|Extension (expiration date)||12/31/2021||12/31/2032||1/1/2022|
|Residential Clean Energy Credit|
|Extension (expiration date)||12/31/2023||12/31/2034||1/1/2022|
|Battery Storage Tech Expense Credit||No||Yes||1/1/2023|
|Energy Efficient Commercial Buildings Deduction|
|Deduction||$1.80/sq ft||$2.50/sq ft||1/1/2023|
|Prevailing Wage and Apprenticeship Requirements||No||Yes||1/1/2023|
|Energy Efficient Building Retrofit Deduction||No||Yes||PIS after 12/31/2022|
|New Energy Efficient Home Credit|
|Available for Unit within Building||No||Yes||1/1/2023|
|Prevailing Wage Requirement||No||Yes||1/1/2023|
Extension, increase, and modifications of nonbusiness energy property credit
There is an extension and increase to the nonbusiness energy property credit (renamed the energy efficient home improvement credit)—which includes energy efficiency improvements and residential energy property expenditures. It also modifies the credit system from a lifetime limitation to an annual limitation to encourage individuals to continuously make energy efficiency investments in their homes.
Residential Clean Energy Credit
An extension is also provided for the residential energy efficiency property credit (renamed the Residential Clean Energy Credit) to 2034 and adds a credit for expenditures related to installing battery storage technology at a dwelling that has at least a capacity of 3 kilowatt hours.
Energy Efficient Commercial Buildings Deduction
The Energy Efficient Commercial Buildings Deduction increases the deduction for property that is constructed following the prevailing wage and apprenticeship requirements.
An alternative deduction for energy efficient building retrofit property has been established. This provision provides a deduction for property that is modified to reduce a building’s energy use by at least 25%. Such property can be installed as part of interior lighting systems, heating, cooling, ventilation, and hot water systems, or the building envelope.
Extension, Increase, and Modifications of New Energy Efficient Home Credit
The legislation extends, increases, and modifies the new energy efficient home credit. This credit has historically been available as a general credit to developers of new construction that meets the energy efficiency requirements. Eligible contractors can now claim the credit on homes sold or leased through 2032, and the amount of credit has more than doubled. Further, the credit is modified to apply—at a lower rate—to purchases of a unit within a building that qualifies for the credit.
|Clean Vehicle Credit|
|Max Credit (New Vehicle)||$1.80||$7,500||1/1/2023|
|Max Credit (Used Vehicle)||$0.00||$4,000||1/1/2023|
|Max Credit (Commercial)||$0.00||$7,500||1/1/2023|
|Manufacturer limitation||Yes||No||1/1/2023 – 12/31/2032|
|AGI limit (New Vehicle)||n/a||$300k/$225k/$150k||1/1/2023|
|AGI limit (Used Vehicle)||$150k/$112.5/$75k||1/1/2023|
|Alternative Refueling Property Credit|
|Prevailing Wage and Apprenticeship Requirements||No||Yes||1/1/2023|
The credit that applies to new electric vehicles has been increased and a credit for used vehicles has been added. Moreover, the IRA removes the manufacturer limitation, and creates an adjusted gross income limit to qualify for both credits. There will be an MSRP limitation of $80,000 for SUVs, pickups, and vans and $55,000 for other vehicles. There is a North American final assembly requirement effective for vehicles sold after the date of enactment (a transitional rule applies where there was a binding contract to purchase a vehicle before the date of enactment). In addition, there are separate requirements for the source country for battery components and the critical minerals in the battery, which would phase in from 50% in 2023 to 100% in 2029.
The alternative fuel refueling property credit has also been extended 10 more years, but subjects business/investment use property to the wage and apprenticeship requirements in order to receive the full credit.
Investment in Clean Energy Manufacturing and Energy Security
Advanced Energy Project Credit
The IRA provides an additional allocation of up to $10 billion of credits for qualifying advanced energy project sponsors. Moreover, it alters the definition of a qualifying advanced energy project. The definition now includes facilities for recycling, water as an applicable renewable resource, components of various systems rather than just the system, electric and hybrid vehicles, and projects which re-equip facilities with equipment designed to reduce greenhouse gas emissions.
Advanced Manufacturing Production Credit
Alongside the CHIPS Act’s Advanced Manufacturing Investment Credit, the Inflation Reduction Act creates the Advanced Manufacturing Production Credit in new Section 45X. The new credit is a general business credit equal to the applicable rate for the type of component produced and sold by the taxpayer. The components range from wind and solar energy components to chemical inverters. The credit is phased out for components sold after December 31, 2029, through December 31, 2032 (100%, 75%, 50%, 25%, 0%).
Incentives for Clean Electricity and Clean Transportation
|Clean Energy Production/Investment Credit|
|Prevailing Wage and Apprenticeship Requirements||No||Yes||1/1/2025|
|Phase Out||n/a||100%, 75%, 50%, 0%||Beginning in 2033|
|Cost Recovery for Qualified Facilities, Qualified Property, and Energy Storage Technology|
|Useful Life for Qualified Facilities||varying||5 years||1/1/2025|
|Clean Fuel Production Credit|
|Clean Fuel Credit||n/a||$1.00/gallon||1/1/2025 – 12/31/2027|
|Sustainable Aviation Fuel Credit||n/a||$1.75/gallon||1/1/2025 – 12/31/2027|
|Prevailing Wage and Apprenticeship Requirement||No||Yes||1/1/2025|
Clean Energy Production Credit and Clean Energy Investment Credit
New sections 45Y and 48E provide credits for clean electricity production and investment, respectively. The clean energy production credit is based on kilowatt hours of electricity produced by the taxpayer at a qualified facility and sold to an unrelated person. A qualified facility for the purposes of these credits is one which is used for the generation of electricity, placed in service after December 31, 2024, and for which the anticipated greenhouse gas emissions rate is zero. Moreover, a facility can be a qualified facility only during the 10 years beginning on the date it was originally placed in service.
The clean energy investment credit provides a credit equal to an applicable rate multiplied by a taxpayer’s basis in qualified facilities or energy storage technologies that are placed in service after December 31, 2024. Energy storage technology is thermal energy storage property or property which receives, stores, and delivers energy for conversion to electricity (or, in the case of hydrogen, which stores energy), and has a nameplate capacity of not less than 5 kilowatt hours.
Cost Recovery for Qualified Facilities
In addition to the credits provided for the qualified facilities, qualified property, and energy storage technology, as newly defined in Sections 45Y and 48E, the Act brings these definitions over into the accelerated depreciation provision of Section 168 and changes the recovery period of such property to 5 years. This change is fairly substantial because the facilities would have otherwise been characterized as nonresidential real property subject to a 39-year recovery period which is not eligible for bonus depreciation.
Clean Fuel Production Credit
Lastly, the clean electricity and clean transportation section of the Act creates the clean fuel production credit in Section 45Z which is a credit for clean fuel—that which is suitable for use as a fuel in a highway vehicle or aircraft—produced and sold in the United States. This credit is equal to $1.00 (or $1.75 in the case of sustainable aviation fuel) per gallon of transportation fuel that is produced at a qualified facility multiplied by an emissions factor—the factor is lowered the more emissions the fuel produces.
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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.