Here Comes the Sun: Treasury and IRS Request Input on Solar and Other Energy Incentives Under the Inflation Reduction Act

The Notices provide lists of key items that interested parties may wish to comment on but request any and all comments. In the Treasury’s briefing about the IRA, they encouraged all interested parties (e.g., labor unions, climate policy thinkers, and others) to provide insight through the comment process. Written comments are requested to be provided by November 4, 2022. Set forth below is a brief overview of the incentives on which Treasury and the IRS are seeking input.

We are hopeful that, with dynamic and thoughtful comments, and with apologies for editing The Beatles’ lyrics, “it [won’t seem] like years [for the IRA to be] clear.”

Energy Incentives

1. Energy Generation Incentives – Notice 2022-49

Production Tax Credit (Section 45): A credit based on the amount of kilowatt hours of electricity produced by a taxpayer from qualified energy resources at a qualified facility and sold by the taxpayer to an unrelated person during the taxable year.

Investment Tax Credit (Section 48): A credit based on the energy percentage of the basis of each energy property placed in service during the taxable year.

(NEW) Zero-Emission Nuclear Power Production Credit (Section 45U): A credit based on the amount of kilowatt hours of electricity produced by the taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person in taxable years beginning after December 31, 2023, and before January 1, 2033.

(NEW) Clean Electricity Production Credit (Section 45Y): A credit based on the amount of kilowatt hours of electricity produced by the taxpayer at a qualified facility placed in service on or after January 1, 2025, for a period of up to ten years, and sold by the taxpayer to an unrelated person (or, in the case of a qualified facility which is equipped with a metering device which is owned and operated by an unrelated person, sold, consumed, or stored by the taxpayer).

(NEW) Clean Electricity Investment Credit (Section 48E): A credit based on the applicable percentage of the qualified investment with respect to any qualified facility placed in service after December 31, 2024, and any energy storage technology.

2. Incentives for Residential and Commercial Buildings – Notice 2022-48

Energy Efficient Home Improvement Credit (Section 25C): A credit for individuals of 30 percent of the sum of the amount paid or incurred for qualified energy efficiency improvements, the amount of residential energy property expenditures paid or incurred, and the amount paid or incurred for home energy audits. This credit is applicable to certain property placed in service on or after January 1, 2023, and certain property placed in service or transportation fuel produced on or after January 1, 2025.

Residential Clean Energy Credit (Section 25D): A credit for individuals of the applicable percentages of qualified solar electric property expenditures, qualified solar water heating property expenditures, qualified fuel cell property expenditures, qualified small wind energy property expenditures, and qualified geothermal heat pump property expenditures made by the taxpayer. The IRA added qualified battery storage technology expenditures made on or after January 1, 2023, to the types of expenditures qualifying for this credit.

New Energy Efficient Home Credit (Section 45L): A credit for eligible contractors based on the applicable amount for each qualified new energy efficient home which is constructed by an eligible contractor and acquired by a person from such eligible contractor for use as a residence. The IRA retroactively extended this credit for dwelling units acquired after December 31, 2021, and acquired before January 1, 2033.

Energy Efficient Commercial Buildings Deduction (Section 179D): A deduction of an amount equal to the cost of energy efficient commercial building property placed in service. The IRA made material modifications to this credit, with the amendments generally taking effect for taxable years beginning after December 31, 2022.

3. Clean Vehicle Credits – Notice 2022-46

Clean Vehicle Credit (Section 30D): A credit of an applicable amount with respect to each new clean vehicle placed in service by the taxpayer during the taxable year. The IRA made material modifications to this credit, with the changes taking effect at various times, ranging from immediately upon the enactment of the IRA, to January 1, 2023, and later dates.

(NEW) Credit for Previously Owned Clean Vehicles (Section 25E): A credit in the case of a qualified buyer (an individual) who places in service after December 31, 2022, and before January 1, 2033, a previously-owned clean vehicle during the taxable year.

4. Manufacturing Credits – Notice 2022-47

Advanced Energy Project Credit (Section 48C): A credit of an applicable amount of the qualified investment with respect to any qualifying advanced energy project of the taxpayer. The IRA made modifications to the credit and provided an additional credit allocation of $10 billion, effective on January 1, 2023.

(NEW) Advanced Manufacturing Production Tax Credit (Section 45X): A credit with respect to each eligible component which is produced and sold by the taxpayer in the course of its trade or business to an unrelated person during the taxable year, applicable to components produced and sold on or after January 1, 2023, with the credit phasing out in the years 2030 through 2032.

Credit Enhancements and Monetization

1. Credit Enhancements – Notice 2022-49 & Notice 2022-51

(NEW) Low Income Community Enhancement to Investment Tax Credit: Sections 48(e), effective January 1, 2023, and 48E(h), effective January 1, 2025, establish a special program for certain solar and wind facilities placed in service in connection with low-income communities. In general, this program provides a 10 percent credit increase for facilities located in a low-income community or on Indian land, and a 20 percent credit increase for facilities that are part of a qualified low-income residential building project or qualified low-income economic benefit project.

(NEW) Prevailing Wage: Sections 45(b)(7), 30C(g)(2), 45L(g), 45Q(h)(3), 45U(d)(2), 45V(e)(3), 45Y(g)(9), 45Z(f)(6), 48(a)(10), 48C(e)(5), 48E(d)(3), and 179D(b)(4) include prevailing wage requirements that taxpayers must satisfy to qualify for increased credit or deduction amounts. In general, a taxpayer satisfies the prevailing wage requirements if the taxpayer ensures that any laborers and mechanics employed by the taxpayer (or any contractor or subcontractor) in the construction of such facility (and for a certain period thereafter for any alterations and repairs) are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality.

(NEW) Apprenticeship: Sections 45(b)(8), 30C(g)(3), 45Q(h)(4), 45V(e)(4), 45Y(g)(10), 45Z(f)(7), 48(a)(11), 48C(e)(6), 48E(d)(4), and 179D(b)(5) include apprenticeship requirements that taxpayers must satisfy to qualify for increased credit or deduction amounts. In general, a taxpayer satisfies the apprenticeship requirements with respect to the construction of a facility if the taxpayer ensures that not less than the applicable percentage of the total labor hours of the construction, alteration, or repair work (including such work performed by any contractor or subcontractor) is performed by qualified apprentices.

(NEW) Domestic Content: Sections 45(b)(9), 48(a)(12), 45Y(g)(11) and 48E(a)(3)(B) provide domestic content requirements that taxpayers must satisfy to qualify for bonus credit amounts. In general, the domestic content requirement is satisfied if the taxpayer certifies that any steel, iron, or manufactured product that is a component of such facility (upon completion of construction) was produced in the United States.

(NEW) Energy Communities: Sections 45(b)(11), 48(a)(14), 45Y(g)(7), and 48E(a)(3)(A) provide energy community requirements that taxpayers must satisfy to qualify for increased credit amounts. In general, the energy community requirement is met if the facility is located in an energy community, a term that includes (A) a brownfield site, (B) certain coal, oil, and natural gas-dependent areas with elevated unemployment rates, and (C) certain areas in or adjacent to which a coal mine closed after December 31, 1999, or a coal-fired electric generating unit was retired after December 31, 2009.

2. Credit Monetization – Notice 2022-50

(NEW) Elective Payment of Applicable Credits (Section 6417): Allows an applicable entity to make an election such that the entity is treated as making a payment against the tax imposed by subtitle A (Income Tax) equal to the amount of an applicable credit. This provision effectively makes certain credits refundable to eligible taxpayers in taxable years beginning after December 31, 2022.

(NEW) Transfer of Certain Credits (Section 6418): Allows an eligible taxpayer to transfer all (or any portion) of an eligible credit to an unrelated taxpayer, effective for taxable years beginning after December 31, 2022.

The ArentFox Schiff Tax and Energy & Cleantech teams are closely monitoring these developments and are working with clients as they seek to navigate the IRA tax incentives. To discuss how these developments may affect your business, please contact the tax professionals at ArentFox Schiff.