The Impact of the Inflation Reduction Act on the Energy Investment Tax Credit and Certain Other Energy Tax Provisions
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the “Act”), which includes a number of tax provisions related to green energy. Below is a brief summary of the Act pertaining to the energy investment tax credit (ITC) of Internal Revenue Code (IRC) Section 48 and certain other energy tax provisions, with the following link to our more detailed article highlighting the impact of the Act on the ITC.
Prior Law With Respect to Energy ITC: Until somewhat recently, taxpayers could obtain a 30% ITC for purchasing and placing in service qualifying energy property, especially a solar power system, with that percentage being gradually phased out with reductions commencing for energy property for which construction began in the year 2020.
Main Revisions to Energy ITC – New Base Credit Percentage of 6%: Under the Act, the base energy percentage for qualifying energy property placed in service after December 31, 2021 is reduced to 6% unless new prevailing wage requirements and apprenticeship requirements are met. Taxpayers will qualify for a 30% ITC (instead of the base 6% credit) if they meet the new prevailing wage requirements and the apprenticeship requirements.
The Prevailing Wage and Apprenticeship Requirements: The prevailing wage requirements require that any laborers and mechanics employed by the taxpayer or any contractors or subcontractors are paid the prevailing wage of the locality of the project (as determined by the Secretary of Labor) for the period of five years beginning when the project is placed into service. The apprenticeship requirements require that designated percentages of the labor be performed by individuals employed through registered apprenticeship programs, based upon when projects begin construction. There are two additional ways of qualifying for the enhanced 30% credit: projects with a maximum net output of less than 1 megawatt of energy, or a project which begins no later than 60 days after the Treasury Secretary publishes rules on the prevailing wage and apprenticeship requirements.
Bonus ITC: Domestic Content and Energy Communities: In addition to the base credit of 6% (or enhanced credit of 30%), an additional tax credit will apply when certain domestic content requirements are met. Generally, a manufactured product will meet this requirement if at least 40% of the total cost of the components is attributable to components that are mined, produced, or manufactured in the United States. An additional credit will apply where a project is established in an Energy Community. An Energy Community is defined as either a brownfield site or a community that meets certain unemployment or tax revenues thresholds.
Bonus ITC: Solar and Wind Facilities in Low-Income Communities: Finally, additional bonus credits are provided for certain smaller scale wind or solar projects, generally located in low-income communities, qualified low-income residential buildings, and American Indian land.
Qualifying Energy Property: The Act adds energy storage technology, qualified biogas property, and microgrid controllers as new types of Energy Property that qualify for the ITC.
Energy-Efficient Commercial Buildings Deduction: The Act also alters the maximum deduction allowable with respect to energy-efficient commercial buildings under IRC Section 179D.
Transfer of Eligible Credits: The Act permits a taxpayer to elect to transfer all or a portion of certain categories of eligible credits to an unrelated eligible taxpayer commencing after the 2022 tax year. These credits are listed in our detailed article.
We would be happy to talk with current and potential clients who have questions on the Inflation Reduction Act or on federal or New Jersey taxation in general. Please contact Peter Ulrich at 973-596-4635 or pulrich@gibbonslaw.com.