IRA energy and climate tax credits

Clean fuel credits

The act extends the fuel tax credits for the sale and use of biodiesel and renewable diesel fuel, biodiesel fuel mixtures, alternative fuel, and alternative fuel mixtures. For these fuels, a taxpayer could claim a $1 per gallon credit. In addition, the second-generation biofuel producer credit also was extended. These credits, which expired as of Dec. 31, 2021, were extended through Dec. 31, 2024.

Clean energy credits

The energy credit for certain property under IRC Section 48, which applies to solar, wind, geothermal, cogeneration, fuel cell, and similar technology, is extended to property on which construction begins before Jan. 1, 2025. In addition, the law adds energy storage technology, qualified biogas property, and microgrid controllers to the types of property that qualify for the credit.

The investment tax credit under IRC Section 48 is reduced from 26% to 6%, but it increases to 30% if prevailing wage and apprenticeship requirements are met. The credit also is increased by either 10% or 20% for the inclusion of domestic materials in the project or locating projects in targeted environmental areas and other targeted communities. The increased credits generally are available for property placed into service after Dec. 31, 2022. Taxpayers also have the option of claiming either the investment tax credit under IRC Section 48 or the production tax credit under Section 45. Taxpayers also can select the limited direct pay option for the Section 48 credit, which allows certain entities to treat the credit as a direct payment against their tax liability. In addition, taxpayers can elect to transfer their credit to another taxpayer for a cash payment, allowing them to reap a current benefit if they are unable to use the credit.

For 2023 and 2024 the IRA also increases the credit from 10% to 20% for qualified solar or wind property located in low-income communities.

Carbon capture and sequestration

Carbon capture and sequestration is the process of capturing and storing atmospheric carbon dioxide to remove carbon from the air. The law extends the IRC Section 45Q credit for qualified facilities that begin construction between Dec. 31, 2022, and Jan. 1, 2033. The IRA maintains the general framework of the prior law but increases the credit (bonus credit) if prevailing wage requirements are met. The following exhibit outlines the credit base amounts and the corresponding bonus amounts for each type of qualified carbon capture or carbon sequestration activity.

Renewable electricity production tax credit (PTC)

The PTC under IRC Section 45 was extended to include property on which construction starts before Jan. 1, 2025. Additionally, the law adds two new requirements for taxpayers to retain the full amount of the 1.5 cents per kilowatt hour credit. Taxpayers now must meet the prevailing wage requirement and the apprenticeship requirement or face a 0.3 cent reduction in the credit amount. The act also provides a 10% credit increase incentive to use steel, iron, or manufactured products produced in the United States.

Accelerated cost recovery for green buildings

The IRA modifies, expands, and extends the energy efficient commercial buildings deduction under IRC Section 179D:

• The required amount of increased efficiency a building must achieve to qualify for the deduction is reduced from 50% to 25%.
• The energy efficiency standard was updated to adhere to ASHRAE 90.1-2007 and will keep current with future ASHRAE standards.
• The partial allowance of the deduction is eliminated.
• The base amount of the deduction is 50 cents per square foot, and the deduction is increased 2 cents for each percentage point in energy efficiency, up to $1 per square foot. A bonus deduction of $2.50 per square foot (base credit multiplied by five) is available if prevailing wage and apprenticeship requirements are met. The deduction also can be increased by 10 cents for each percentage point increase in energy efficiency, up to $5 per square foot.
• The deduction is broadened to allow tax-exempt entities to allocate it to the property designer.
• Real estate investment trusts can apply the deduction against earnings and profits.

Looking ahead

While the legislation is fairly prescriptive, many questions still remain. It is likely that the U.S. Department of the Treasury and the IRS will not be able to provide all of the guidance needed before the provisions become effective. Even if guidance is provided early, it likely will not address all questions. Taxpayers should be prepared for an iterative process that will include updated, revised, and corrected guidance issued over an extended period. Like taxpayers’ experience with immediate or near-immediate effective dates for provisions enacted under the Tax Cuts and Jobs Act of 2017 and legislation providing pandemic relief, taxpayers will have increased reliance on qualified tax advisers to help them navigate this changing landscape.