The Inflation Reduction Act (IRA) introduced updates to tax credits for renewable energy projects, energy storage systems, and clean energy manufacturing in the United States. These incentives are key for businesses aiming to leverage federal support for clean energy initiatives while aligning with environmental goals. Here’s a high-level overview of the relevant tax credit opportunities and changes under the IRA that could impact your business.
Overview of Renewable Energy Tax Credits
The IRA offers two primary tax credit programs designed to promote renewable energy and energy storage:
- Investment Tax Credit (ITC):
-
- Reduces federal income tax liability by a percentage of the cost of a qualifying renewable energy system (e.g., solar installations).
- Applies to projects with an anticipated zero greenhouse gas emissions rate, such as wind, solar, and energy storage technologies.
-
- Production Tax Credit (PTC):
-
- Provides a credit per kilowatt-hour (kWh) of electricity generated by qualifying renewable energy projects for the first 10 years of operation.
- Adjusted annually for inflation and beneficial for projects focused on consistent energy production.
-
The Environmental Protection Agency (EPA) provides eligibility guidelines to help businesses determine whether the ITC or PTC is the best fit for their projects. For example, projects like solar and wind installations may qualify for either, while geothermal heat pumps and energy storage systems are more aligned with the ITC.
| Eligible for ITC or PTC | Eligible for ITC | Eligible for PTC |
|---|---|---|
|
|
|
2025 Updates: Transition to Technology-Neutral Tax Credits
Beginning January 1, 2025, the IRA replaces Sections 45 and 48 of the Internal Revenue Code with technology-neutral Sections 45Y (Clean Energy Production Tax Credit) and 48E (Clean Electricity Investment Tax Credit). These updates aim to simplify and expand accessibility for renewable energy projects, emphasizing the following programs:
48C Advanced Energy Project Investment Tax Credit
-
-
- Offers a 30% credit for investments in industrial or manufacturing facilities producing clean energy components, provided labor requirements are met.
- Projects failing to meet these requirements receive a reduced credit of 6%.
-
45X Advanced Manufacturing Production Tax Credit
-
- Provides tax credits for each domestically produced clean energy component.
- Particularly advantageous for manufacturers producing components eligible for the credit before its scheduled sunset phase.
Key Differentiators: ITC vs. PTC and Manufacturing Credits
Businesses cannot claim both the 45X Manufacturing PTC and 48C ITC for the same project. For instance, if a manufacturing facility producing solar system components has claimed the ITC after August 2022, it cannot also claim the 45X credit. However, co-located projects (e.g., solar and storage) may qualify for separate credits depending on IRS guidance.
The 45X MPTC is often more advantageous for manufacturers, especially since the critical minerals provision under the PTC is set to continue indefinitely. For facilities producing eligible components, maximizing these credits could be a strategic move before their phaseout.
Bonuses and Domestic Content Requirements
The IRA offers additional bonuses for projects meeting certain criteria:
- Domestic Content Bonus:
- Adds 10 percentage points to the ITC or $0.03/kWh to the PTC for projects using U.S.-made steel, iron, and manufactured products.
- Initial domestic content requirements mandate at least 40% of components be U.S.-made, increasing to 55% over time.
- Energy Community Bonus:
- Available for projects located in brownfield sites, former coal mine regions, or areas with retired coal-fired power plants.
- Low-Income Community and Indian Land Bonuses:
- Provides up to an additional 20% ITC for small projects (less than 5 MWAC) located in low-income communities or on Indian lands.
Project Size and Labor Requirements
Eligibility for the ITC and PTC also depends on the size of the energy storage system and labor standards:
- Projects under 1 MWAC: Qualify for the full 30% ITC or $0.0275/kWh PTC with minimal labor requirements.
- Projects over 1 MWAC: Must meet prevailing wage and apprenticeship standards to qualify for full credits, including a 24% ITC bonus or $0.0225/kWh PTC bonus.
Phaseouts and Long-Term Considerations
The IRA outlines a gradual phaseout of these tax credits starting in 2032 or when the U.S. achieves a 75% reduction in greenhouse gas emissions, whichever comes later:
- Projects entering construction in 2033 will qualify for 100% of the credits.
- Credits reduce to 75% in 2034 and 50% in 2035, with ineligibility for projects starting in 2036 or later.
What This Means for Your Business
The IRA’s tax credit framework offers substantial opportunities for businesses in renewable energy, manufacturing, and infrastructure. Whether you’re planning a solar installation, developing energy storage solutions, or manufacturing clean energy components, understanding these credits can help maximize your return on investment.
Stay Informed
For clients and partners, A10 Associates offers detailed memos and strategic advice tailored to your industry and company. Contact us to learn more about how these changes may impact your projects and how to leverage these credits effectively.
