ARTICLE | November 14, 2022
Authored by RSM US LLP
President Biden recently signed the Inflation Reduction Act of 2022 (“the Act”) into law. The Act provides for an array of tax credits intending to spur significant project development in the renewable energy space. These tax credits will affect businesses across various sectors. This article will focus on the credits that affect the Industrials sector- including manufacturing, automotive, and power and utilities. For information on provisions affecting the energy industry, review RSM’s explanation of the Clean Fuels provisions. While many questions remain on the implementation of these new incentives, Treasury is drafting guidance and has requested comments from affected stakeholders.
Clean Energy Incentives - Overview
The Act includes many clean energy incentives affecting manufacturers. The Act extends and expands the energy investment tax credit which applies to entities placing in service certain renewable energy property at their facility- including solar, geothermal, waste energy recovery property, and combined heat and power cogeneration systems. Additionally, the Act includes a new round of funding for the qualifying advanced energy manufacturing credit and expands the definition of qualifying projects. There have also been significant incentives to facilitate the purchase of passenger and commercial electric vehicles and refueling equipment. The Act also provides for new opportunities for monetization of some of the credits by making some of the credits essentially refundable through the “direct pay” provisions. In other situations, credits can be sold for cash under “transferability” provisions.
Base and Bonus rates - Apprenticeship and Prevailing Wage Requirements
Applicable to many of the provisions, the Act makes significant changes by replacing the existing credit regime with a two-tiered system that provides a minimum “base” credit amount and a maximum “bonus” credit amount that is five times the base amount. Both amounts will vary depending on the relevant project. The bonus credit amount will be available only if certain prevailing wage and apprenticeship requirements are satisfied in connection with the relevant project.
To qualify for the bonus credit rates for many of the incentives, the taxpayer must meet certain apprenticeship and prevailing wage requirements. In general, for the apprenticeship requirements, the taxpayer must ensure that, with respect to the construction of a qualified facility, no fewer than the “applicable percentage” of total labor hours are performed by qualified apprentices. Additionally, in order to satisfy the prevailing wage requirements, the taxpayer must ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor for a renewable energy project are paid prevailing wages in the locality in which the project is located (as determined by the Secretary of Labor) during the construction of such project and with respect to subsequent alterations or repairs of the project following its placement in service.
Credit “Adders” - Domestic Content Requirements; Energy Communities
The Act also provides for incremental tax credits for certain renewable projects that are placed in service after 2022 and meet certain “domestic content” requirements and/or are located in specified areas or communities.
An increased tax credit rate for certain renewable energy projects may apply for projects that meet certain domestic content requirements. To meet this requirement, taxpayers must ensure that the steel, iron, or other manufactured products that comprise the project are produced in the United States. Generally, a manufactured product will be considered manufactured in the United States if a specified percentage of the total cost of the components is attributable to components that are mined, produced, or manufactured in the United States.
Additionally, an increased credit rate may apply for certain projects located in an “energy community”. An energy community is either (1) a brownfield site; (2) an area that has employment or local tax revenue related to extraction, processing, transport, or storage of coal, oil, or natural gas and an unemployment rate at or above the national average; or (3) a census tract where a coal mine has closed or a coal-fired electric generating unit has been retired, or a census tract directly adjoining the mine or unit.
Important to project development and financing, the Act provides alternative ways to monetize renewable tax credits by allowing certain entities or projects to either (i) receive a cash payment from the government in lieu of tax credits by utilizing a “direct-pay” election under section 6417 or (ii) sell tax credits to third parties under section 6418.
Incentives for Manufacturers
New production tax credit for advanced manufacturing
New section 45X provides a production tax credit (“PTC”) for domestic manufacturers of certain energy property including solar, wind energy, and certain battery components. The credit is for claimed on a per-item basis for qualifying articles that are produced and sold. Eligible components include solar polysilicon, wafers, cells, modules, back sheets, torque tubes, structural fasteners, wind blades, nacelles, towers, offshore foundations, inverters; electrode active materials, critical minerals.
The full credit is for eligible components produced and sold before January 1, 2030. For components sold after that date, the credit is reduced by 25 percent each year. This credit is available for components produced and sold after 2022 and does not apply to components sold after 2032. This credit allows for a direct pay option for claimants.
New funding allocation for advanced energy projects
The Act revives the section 48C advanced energy project credit, allowing Treasury to allocate an additional $10 billion in tax credits to qualifying projects beginning in 2023 through 2031. New section 48C provides a base credit amount of 6 percent and a bonus rate of 30 percent for construction, re-equipping, or expansion of a manufacturing facility that constructs qualifying property. Included in the definition of qualifying property is:
- Property designed to produce energy conservation technologies (including residential, commercial, and industrial applications)
- Fuel cells, microturbines, or energy storage systems and components
- Property designed to be used to produce energy from the sun, water, wind, geothermal deposits, or other renewable resources
- Grid modernization equipment or components
- Property designed to remove, use, or sequester carbon oxide emissions
- Equipment designed to refine, electrolyze, or blend any fuel, chemical, or product which is renewable, low-carbon, and low emission
- Light-, medium-, or heavy-duty electric or fuel cell vehicles, as well as technologies, components, or materials for such vehicles, and associated charging or refueling infrastructure
- Hybrid vehicles with a gross vehicle weight rating of not less than 14,000 pounds, as well as technologies, components, or materials for such vehicles
- Other advanced energy property designed to reduce GHG emissions as may be determined by the Secretary
Also included is property that re-equips an industrial or manufacturing facility with equipment designed to reduce GHG emissions by at least 20% through the installation of certain property (e.g., low- or zero-carbon process heat systems, carbon capture, transport, utilization, and storage systems, critical materials processing, refining, or recycling).
Treasury is expected to issue guidance on applications for receiving a credit allocation by February 2023. Criteria for selection of a credit allocation includes:
- Reasonable expectation of commercial viability
- Greatest job creation (direct/indirect)
- Greatest net impact in avoiding air pollutants and emissions
- Greatest potential for technological innovation and commercial deployment
- Lowest levelized cost of generated or stored energy, or of measured reduction in energy consumption or GHG emission
- Shortest time from certification to completion
For taxpayers receiving a credit allocation, the credit is claimed in the year the property is placed in service. To receive the bonus rate, taxpayers must satisfy the prevailing wage and apprenticeship requirements.
This credit allows for monetization through transfer to another taxpayer for cash.
Extension and modification of the investment tax credit
The investment tax credit (ITC) is claimed by many manufacturers that install renewable energy property at their facilities. In most cases, the Act extends the credit for property for construction that begins before January 1, 2025. The provision generally provides a base credit rate of 6 percent of the basis of energy property or a bonus credit rate of 30 percent of the basis of energy property. These credit rates apply with respect to facilities placed into service after December 31, 2021. In order to claim the ITC at the bonus credit rate, taxpayers must generally satisfy the prevailing wage and apprenticeship requirements.
The ITC is expanded to include energy storage technology, biogas property, microgrid controllers, dynamic glass, interconnection property, and linear generators placed in service beginning January 1, 2023. These technologies are eligible for a 6 percent base credit rate or a 30 percent bonus credit rate for any property that begins construction before January 1, 2025.
Credit adders of 10 percentage points for domestic content and an additional 10 percentage points for locations in an energy community may apply. An additional credit adder may apply for wind or solar projects located in low-income communities.
This credit may be monetized through transfer to another taxpayer for cash.
The Act modifies the tax credits for clean vehicles and provides for a new tax credit for qualified commercial clean vehicles. It also extends and expands the alternative fuel refueling property credit. These provisions will have a profound impact on the automotive industry. It is expected that the automotive industry will also benefit tremendously from commercial sales of these products. Certain manufacturers in the automotive industry may benefit from the section 45X PTC and the section 48C advanced energy project credit.
Clean vehicle tax credit
The Act amends the existing 30D tax credit to apply to new clean vehicles placed into service by the taxpayer during the taxable year.
The amount of credit allowed by this provision with respect to a qualified vehicle is equal to a maximum of $7,500 for a vehicle propelled primarily by electricity, with a battery of at least 7 kilowatt hours, or a hydrogen fuel cell electric vehicle. Eligible vehicles must meet the critical mineral or battery component requirements. Vehicles which meet one of the requirements, but not both, are eligible for a credit of $3,750.
To meet the critical mineral requirement, the applicable percentage of critical minerals contained in the battery must be extracted or processed in a country with which the United States has a free trade agreement or have been recycled in North America. The applicable percentage is:
- For calendar years prior to 2024, 40 percent
- For calendar year 2024, 50 percent
- For calendar year 2025, 60 percent
- For calendar year 2026, 70 percent
- For calendar years after 2026, 80 percent
To meet the battery content requirement, the applicable percentage of the components contained in the battery used in the vehicle must be manufactured or assembled in North America. The applicable percentage is:
- For calendar years prior to 2024, 50 percent
- For calendar years 2024 and 2025, 60 percent
- For calendar year 2026, 70 percent
- For calendar year 2027, 80 percent
- For calendar year 2028, 90 percent
- For calendar years after 2028, 100 percent
Clean vehicles must be assembled in the United States. For calendar years after 2023, a clean vehicle may not contain any battery components which were manufactured by a foreign entity of concern (as defined in 42 U.S.C. 18741(a)(5)), and, after calendar year 2024, a clean vehicle may not contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern.
Clean vehicles must be sold by a qualified manufacturer. A qualified manufacturer is one which enters into written agreement with the Secretary to ensure each vehicle manufactured meets the requirements of this provision, labeled with a unique vehicle identification number, and requires the manufacturer to periodically provide such vehicle identification numbers to the Secretary in such a manner as the Secretary may prescribe.
No credit shall be allowed for vehicles by which the manufacturer’s suggested retail price exceeds the applicable limitation, which is as follows:
- Vans: $80,000
- SUVs: $80,000
- Pick-up Trucks: $80,000
- For any other vehicle: $55,000
Notably, no credit is allowed to a taxpayer with a modified adjusted gross income in excess of the threshold amount of $300,000 for married filing jointly, $225,000 for head of household, and $150,000 in any other case. For a given taxable year, the taxpayer may use modified adjusted gross income for that year or the immediately preceding year, whichever is lower.
The taxpayer may elect to transfer the credit to the vehicle dealer, provided the dealer is registered as an eligible entity with the Secretary, discloses the MSRP, credit amount, associated fees, and the amount to be paid to the taxpayer in the form of a down payment or otherwise with respect to the transfer of credit. The Secretary shall establish a program to make advance payments to any eligible dealer equal to the cumulative amount of transferred credits.
This provision generally applies to vehicles placed in service after December 31, 2022. The requirement that vehicles be assembled in North America applies to vehicles sold after the date of enactment. Treasury has issued guidance related to this provision. The provision allowing transfers of the credit applies to vehicles sold after December 31, 2023. The credit is not allowed for any vehicle placed in service after December 31, 2032.
New tax credit for qualified commercial clean vehicles
This provision creates a new tax credit for qualified commercial electric vehicles. The credit amount is equal to 30 percent of the cost of the vehicle, up to $7,500 for vehicles that weigh less than 14,000 pounds, and up to $40,000 for all other vehicles. This provision is effective for vehicles acquired after December 31, 2022, and before December 31, 2032.
New tax credit for qualified previously-owned clean vehicles
This provision creates a new tax credit for qualified previously-owned vehicles. The credit amount is the lesser of 30 percent of the sale price of the vehicle or $4,000. Notably, no credit is allowed to a taxpayer with a modified adjusted gross income in excess of the threshold amount of $150,000 for married filing jointly, $112,500 for head of household, and $75,000 in any other case. For a given taxable year, the taxpayer may use modified adjusted gross income for that year or the immediately preceding year, whichever is lower. This provision is effective for vehicles acquired after December 31, 2022, and before December 31, 2032.
Alternative fuel refueling property credit
The provision extends the alternative fuel vehicle refueling property credit through 2032. The provision expands the credit for zero-emissions charging and refueling infrastructure, providing a base credit of 6 percent and a bonus credit level of 30 percent for expenses up to $100,000 for each charging station or refueling pump installed. In order to claim the bonus credit amount with respect to eligible property, taxpayers must satisfy prevailing wage requirements. Notably beginning in 2023, charging or refueling property is only eligible if it is placed in service within a low-income or rural census tract. This credit may be monetized through transfer to another taxpayer for cash. The provision is effective for property placed in service after 2022.
New production tax credit for advanced manufacturing and new funding allocation for advanced energy projects
As discussed in more detail above, certain manufacturers in the automotive industry may benefit from the section 45X PTC and the section 48C advanced energy project credit.
Power and Utilities
The Act also contains provisions that would affect the power and utilities industry. These include provisions that extend and expand the credit for production of electricity from renewable sources, a new credit related to nuclear power production, a new credit for the production of clean hydrogen, and an investment tax credit for interconnection property.
Extend and modification of the production tax credit
The provision extends the current law production tax credit (PTC) under IRC section 45 for five years, for facilities that begin construction before January 1, 2025. The PTC provides a tax credit for each kilowatt of electricity produced from qualifying facilities and sold to an unrelated party. Qualifying resources are generally sources of renewable electricity, including wind, biomass, municipal solid waste (including landfill gas and trash), geothermal, hydropower, and marine and hydrokinetic energy. The provision also revives the PTC for solar energy (previously sunset in 2006) for facilities which commence construction before January 1, 2025.
The provision provides taxpayers the option of a base credit rate of 0.5 cents/kilowatt hour, or a bonus credit rate of 2.5 cents/kilowatt hour (inflation adjusted values) for those facilities that meet the prevailing wage and apprenticeship requirements. In order to claim the credit at the bonus credit rate, taxpayers must satisfy the prevailing wage requirements for the duration of the construction of the project and for each year during the 10-year credit period, and apprenticeship requirements during the construction of the project. If a facility meets the domestic content requirements, the credit rate is increased by 10 percent. The credit may be transferred for cash. This provision applies to facilities placed in service after December 31, 2024.
New Zero- emission nuclear power production tax credit
The provision provides a credit for the production of electricity from a qualified nuclear power facility. The provision provides a base credit rate of 0.3 cents/kilowatt hour and a bonus credit rate of 1.5 cents/kilowatt hour for electricity produced by the taxpayer and sold to an unrelated person during the taxable year.
The credit is reduced as the sale price of such electricity increases. Under the credit reduction formula, the credit for any qualified nuclear power facility is reduced (but not below zero) by 80 percent of the excess of the gross receipts (including Federal, State, and local zero-emissions grants) from any electricity produced and sold by such facility over the product of 0.5 cents times the amount of electricity sold during the taxable year.
In order to claim the PTC at the bonus credit rate, taxpayers must satisfy prevailing wage and apprenticeship requirements for the taxable year. A qualified nuclear power facility is any nuclear facility that is owned by the taxpayer, uses nuclear energy to produce electricity, and is placed in service before the date of enactment.
The provision applies to electricity produced and sold after December 31, 2023 and terminates on December 31, 2032. This credit may be transferred for cash.
New tax credit for clean hydrogen
This provision creates a new tax credit for the production of clean hydrogen by a taxpayer at a qualified clean hydrogen facility during the 10-year period beginning on the date such facility is placed in service. The credit amount is up to a maximum base rate of $0.60 or maximum bonus rate of $3.00 per kg of clean hydrogen produced by the taxpayer during the taxable year. The credit rate is determined based on the lifecycle greenhouse gas emission rate. To claim the bonus credit rate, taxpayers must satisfy the prevailing wage and apprenticeship requirements for the duration of the project during the 10-year credit period. Facilities which begin construction after December 31, 2032, will not be eligible for the credit. This credit allows for a direct pay by the taxpayer or transferability.
Washington National Tax takeaways
Manufacturers and industrials companies have expanded opportunities to invest in renewable energy projects under the Act. The Act’s intent to incentivize the development of U.S. manufacturing of renewable energy components is effectuated through many clean energy incentives including those for production of renewable energy components and for building, expanding, or re-equipping a manufacturing facility for advanced energy projects. Further, credits for the automotive industry and their customers will incentivize the production sale and resale of electric vehicles and refueling property.
The provisions outlined above are a major expansion of existing clean energy incentives in the tax code. Taxpayers should evaluate all potential credit opportunities and model the financial impacts on investing in a clean energy project.
Additional guidance will be critical for taxpayers, specifically with respect to the proposed direct pay and transferability of credits, requirements governing apprenticeship hours; prevailing wages; and domestic contents. Treasury has indicated it is working with the public to accelerate the process for issuing guidance to benefit taxpayers as soon as possible. It has indicated that over the coming weeks, several initial stakeholder roundtables with industry, labor unions, climate, and environmental justice advocates, and others will be convened so that Treasury can hear directly from a wide range of voices. The Administration has indicated that Treasury plans to prioritize areas of the law where Congress set deadlines as early as next year such as the section 48C credit, as well as the wage and apprenticeship requirements.
This article was written by Deborah Gordon, Christian Wood and originally appeared on 2022-11-14.
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