The renewable energy sector in the United States is standing at a pivotal moment after the Biden administration signed the Inflation Reduction Act (IRA) into law. This act allocates a lot for energy security and climate change through the next 8 years, regardless of which political party runs the next administration.
The Inflation Reduction Act represents a landmark investment in climate change mitigation, offering companies operating in the clean energy sector easy access to tax credits for future projects. Recent updates from the transition team indicate that certain tax credits may be eliminated or reduced as part of a potential tax reform package in the first 100 days, which aims to extend the 2017 Trump tax cuts. Businesses are encouraged to utilize these credits now for 2024, as they may no longer be available next year.
What is the Inflation Reduction Act 2022?
The IRA, or the Inflation Reduction Act, aims to decrease inflation and lower healthcare costs nationwide. It also aims to increase domestic energy production investment while lowering the carbon footprint of this booming sector. This act, passed in August 2022, includes $369 billion in energy sector funding. It pushes high-tech firms and the world’s largest carbon emitters to adopt greener energy production solutions.
The Inflation Reduction Act of 2022 doesn’t just allocate billions of dollars toward clean energy initiatives and aims to reduce carbon emissions by 40% by 2030. It’s a great opportunity for the key players in the renewable energy sector to avail themselves of these tax credits, especially since the funding is politically secure.
An Overview of the Tax Credits for Renewable Energy Projects
The 179D Inflation Reduction Act introduces many tax credits to promote renewable energy projects. These tax credits improve the financial incentives for clean energy investments in the US. Some key features of these tax credits include:
- Investment Tax Credit (ITC): Extending the ITC, this regulation provides a 30% tax credit for qualifying investments in renewable energy, such as solar/wind projects. This credit may increase by up to 10 percentage points for projects in a low-income community.
- Production Tax Credit (PTC): Modified by the IRA 2022, this regulation offers a credit of up to $0.0275 per kilowatt-hour for generating power via qualified renewable energy sources. It gets a 10% boost if the project is located in a community meeting prevailing wage and apprenticeship (PWA) standards (it’ll be explained later). Moreover, the Inflation Reduction Act legislation allows certain non-taxable entities to receive tax credits as direct payments from the IRS. These entities include state and local governments as well as nonprofits in America. This way, the IRA 2022 facilitates easier access to funding for renewable energy projects. So, the Inflation Reduction Act of 2022 levels the playing field.
Evolution of Tax Credits for Renewable Energy Projects
Renewable energy project tax credits have evolved significantly in the last 8 years. These tax credits showcase a major shift in legislative changes & adaptations aimed at promoting clean energy production.
- 2016 Extensions: The Consolidated Appropriations Act of 2016 extended the ITC and PTC for wind and solar projects. This act maintained the ITC at 30%, gradually decreasing to 10% by ’22. The PTC was set at $0.023 per kilowatt-hour for wind projects.
- Tax Credit Modifications: The ITC witnessed certain amendments in 2020 to allow projects to claim tax credits based on the construction date. This change stabilized investments in the renewable energy sector during uncertain economic environments. From 2025 onwards, tax credits will also be available as tech-neutral incentives. So, qualifying clean energy projects can choose between the ITC and PTC.
Energy Generation & Carbon Capture Tax Credits
Going into the Inflation Reduction Act of 2022 details, we realize that these tax credits are available for energy generation and carbon capture:
- Production Tax Credit for Electricity: 10 years for projects placed in service from now until January 1, 2025, for wind and January 1, 2033, for solar
- Clean Electricity Production Credit: 10 years for projects placed in service after December 31, 2024 (phaseout begins in 2032)
- Credit for Carbon Oxide Sequestration: 12 years for projects placed in service before January 1, 2033
- Investment Tax Credit for Energy Property: For projects placed in service between 2022 to 2034
- Zero-Emission Nuclear Power Production Credit: Expires December 31, 2032. Moreover, other tax credits are available as per this act, as explained in our memo, “Overview of Federal Tax Credits .” Please reach out if you’d like to receive this memo.
PWA Eligibility Criteria
All solar and wind energy projects in the United States with a capacity of 1 MW or greater must meet regional PWA requirements to qualify for clean energy credits.
- Meeting prevailing wage and apprenticeship requirements will qualify you for the full credit amount.
- Failure to qualify will render you eligible to receive only 20% of the full credit amount.
- The amount reduces from 30% to 6% when the PWA requirements aren’t met for manufacturing credits. This provision ensures these projects contribute to local job creation and workforce development within the renewable energy sector.
Inflation Reduction Act: The Application Process?
How to Apply for IRA-Funded Tax Credits?
Clients can apply for IRA-funded renewable energy tax credits in the following six steps:
- Initial client consultation and documentation collection
- Application preparation and internal review
- Client review and approval
- Submission to relevant authorities
- Response to any information requests
- Final approval and implementation
Opportunities for Growth
In short, the ITC and the PTC are set to continue through 2032 as per the Inflation Reduction Act 2022. This act makes the PTC available for projects that start construction before January 1, 2015. The ITC is available to solar projects starting before January 1, 2033. As the most significant investment in the American climate and energy sector, this act introduces new tax credits for renewable energy projects.
The US energy sector can overcome the common challenges facing this industry by focusing more on innovation, collaboration, and policy flexibility. Reach out if you want to discuss these tax credits further with our team or need assistance applying. Our team at A10 Associates has the experience needed to get your business access to these tax credits.
