On August 16, 2022, Congress passed the Inflation Reduction Act (IRA), aimed, as the name suggests, at addressing and reducing rising inflation, but which also significantly aids the advanced energy industry to make giant strides towards putting the United States back on track to cut emissions anywhere from 31% to 44% below 2005 levels. Specifically, the IRA created tax incentives and a grant program designed to cut energy costs for consumers, along with a $369 billion investment into energy security and climate change-related measures. While this is an extensive and expansive legislative package, this article aims to focus on just a few of the more significant portions of the bill that may dramatically change how the renewable energy industry operates. It is a massive step towards meeting U.S. obligations under the Paris Agreement and towards achieving net-zero by 2050.
A Shift to Boost Tax Credits
One of the groundbreaking contributions of the IRA was to extend and boost lucrative tax credits to homeowners and project developers who make the switch from traditional energy sources to wind and solar energy. The IRA allows these individuals and entities to claim up to 30% of the value of a project as a tax credit, which would, for instance, take $6,000 off of the cost of a standard $20,000 system. These credits ought to incentivize an increased reliance on alternative energies in both the commercial and residential spheres.
Moreover, the IRA expands businesses’ options for financing clean energy projects by allowing businesses to sell their tax credits for cash. This is a shift away from traditional tax equity financing; rather than having to find an equity partner in exchange for the right to tax credits, businesses can now elect to transfer their tax credits to a third party—for cash—to raise capital. Importantly, this cash would not be counted as taxable income, which only sweetens the deal. The legislation specifically identifies 10 types of transferable credits.
Another, but certainly not the only, other incentive towards a net-zero goal is the new availability of production tax credits (PTC) for solar projects. A PTC is a per-kilowatt-hour credit for producing energy from a qualifying resource under the IRA. This stands in distinction to an investment tax credit (ITC), which is a one-time payment after a qualifying facility is placed into service, based on a percentage of the cost of the project. Previously, solar projects were not eligible for PTCs; but now under the IRA, solar projects have the option to elect between ITCs and PTCs. This will radically change the investment opportunity landscape for the solar industry, providing stakeholders with increased incentives to further invest in the solar market.
With new developments and opportunities come new hurdles to clear along the way. Solar projects that start after January 29, 2023, must comply with the prevailing wage and apprenticeship requirement to receive tax credits. The requirements of these mandated labor protections are not yet clearly spelled out in the IRA and are the subject of future Treasury Department guidance . Navigating regulatory compliance and associated disputes will be among a litany of legal hurdles for those seeking the IRA’s new PTCs. And, while the Treasury Department’s most recent guidance, released November 30, 2022, directs project stakeholders to a Department of Labor website for all guidance in relation to wage determinations and job classifications, the Department of Labor has not yet fully fleshed out this guidance across all classifications and regions. Due to the asymmetrical nature of the guidance, some prospective projects must contact the Department of Labor’s Wage and Hour Division to request a wage rate determination.
Communication with government agencies can require submitting large amounts of information in meticulous format and in accordance with a series of strict timelines. In the case of these new wage determinations (which have not yet been created as of the writing of this article), stakeholders must provide the location of the project, proposed labor classifications, wage rates, job descriptions, and an outline of duties, along with any supporting reasoning for the designated classifications to receive wage determinations and rates. Moreover, the Department of Labor is unclear with respect to how long the process of determining wages will take. Developers of new projects should be aware of these regulations and communicate regularly with all involved agencies, including the Department of Labor, to ensure compliance with the IRA’s evolving mandates.
In its nascent stages, the IRA’s extension of tax credits, including the creation of a solar PTC, promises new opportunity for investment in an expanding industry, but the path forward is still being developed. Exact guidance has yet to be developed and issued on labor protection requirements and the types of records required to show compliance with both the wage and apprenticeship program. While we are still waiting for more guidance from the Treasury Department, it is evident that assembling the proper documentation for each project will make communication with the requisite government agencies more efficient, increase the likelihood of qualifying for tax credit, and provide a better assessment for potential project returns.
Moye White’s Advanced Energy Group attorneys are closely monitoring all developments related to the Inflation Reduction Act created tax incentives and a grant program. If you have questions about how these new credits can impacty your business strategies, please contact your Moye White attorney directly.
The information provided here is for informational purposes only and is not intended to, constitute legal, tax or accounting advice; instead, all information, content, and materials available on this site are for general informational purposes only.