Although its official name is the Inflation Reduction Act of 2022, the wide-ranging tax and spending measure that was signed into law in August might be more accurately described as an energy-related tax incentives act. The new law, commonly referred to as the IRA, contains more than $270 billion in energy- and climate-related tax incentives, including 11 new programs to encourage businesses and individuals to produce and use clean or renewable energy. It also extends or expands another 14 energy-related tax incentives.
Because of the number, variety, and complexity of these provisions, it can be difficult for businesses to determine if they are taking full advantage of the credits they are qualified to receive. Here is an overview of the major features business owners and managers should be aware of as they prepare to meet with their tax professionals.
Who Can Benefit
Three groups of taxpayers stand to benefit from the IRA’s energy and climate provisions:
- Energy Sector Businesses. The new law extends and expands several widely used tax credits for renewable energy projects—including both investment tax credits and production tax credits. Some of these credits previously were scheduled to phase out, but the IRA extended them to include projects that start construction before Jan. 1, 2025.
After that date, the law introduces new and expanded clean energy investment and production tax credit programs. These will apply to an even wider range of power generation and storage projects and will also include various multipliers and added incentives based on a project’s location, employment practices, and other factors. The IRA also incorporates new credits for clean hydrogen production and zero-emission nuclear power generation, as well as a new credit for the manufacture of various clean energy components such as photovoltaic cells, battery cells, and solar and wind energy equipment, provided they are produced in the U.S.
- Other Businesses. Non-energy businesses can also benefit from the IRA. For example, the new law makes it easier to qualify for the energy-efficient commercial buildings deduction under Internal Revenue Code Section 179D. The law also provides enhanced credits for constructing energy efficient single-family or multifamily housing units. Commercial property owners may also earn credits for installing electric vehicle charging stations. In addition, the IRA increases various other clean energy incentives for businesses, including new credits for electric passenger and commercial vehicles used by a business and credits for the use of biodiesel and other alternative fuels.
- Individual Taxpayers and Energy Consumers. The IRA extends existing tax credits for the purchase of new hybrid or electric vehicles and adds a new credit for the purchase of used electric vehicles. But new price limits, purchaser income limits, and domestic sourcing tests, which go into effect Jan. 1, 2023, could make it harder to qualify. The new law also expands several programs to encourage more energy efficient buildings, such as the Residential Clean Energy Credit and the Energy Efficient Home Improvement Credit, among others.
Transferability: A Major Enhancement
One of the most consequential features of the IRA is a provision that allows companies that generate more energy-related tax credits than they need to turn those unused credits into cash. Starting Jan. 1, 2023, a company may transfer most unused energy-related tax credits to an unrelated taxpayer in exchange for a cash payment. What’s more, the income from the sale is not taxable to the seller. Naturally, the cost is not deductible to the purchaser, but the recipient can use the credit to reduce its own tax payment.
In the past, companies with excess credits could transfer them only by establishing complex tax equity partnership arrangements with the recipients. The new provision, which applies to nearly all tax credits in the IRA, greatly simplifies the process and enables companies that generate more credits than they need to convert those credits to tax-free income.
Timing, Multipliers, and Other Variables
Many of the new tax credits incorporate multipliers or bonuses that can greatly increase their value. For example, compliance with prevailing wage requirements, the use of apprenticeship programs, and locating projects in low-income or otherwise distressed communities can significantly boost the value of investment or production credits. Companies that plan to take advantage of such tax credits should take careful note of these variables in order to maximize their benefit.
Project timing is also critical. Some of the new or modified incentives go into effect in the 2023 tax year; others apply only to projects that begin after Dec. 31, 2024. In some cases, projects must be launched relatively quickly once IRS guidance is published in order to earn higher incentives.
The IRS likely will need many months to develop all the necessary rules, regulations, and guidance to implement the new law. The Treasury Department has started fast-tracking some of the regulations, such as new guidance on electric vehicle credits, but other provisions will require extended public input, review, and revisions before they become final.
While this process continues, it is especially important that businesses affected by the IRA’s energy-related tax incentives work closely with their tax professionals to stay abreast of the developing program requirements.
Please call Holbrook & Manter today to schedule a more detailed discussion of available energy-related tax incentives.