The Inflation Reduction Act (IRA) that President Biden signed into law on August 16 ran, all told, about 725 pages. One of the more complex and—for businesses—interesting portions of this law involves its restructuring and expanding of clean-energy tax credits, which may provide opportunities for companies operating in and around the clean-energy area.
The IRA increased the tax credits’ appeal by extending them at full value for 10 years; the credits only decline once power-sector carbon emissions fall to 75% of today’s levels. It also expanded the scope of these credits, allowing almost any new zero-emissions project to qualify for either Production Tax Credits, Investment Tax Credits, or both.
One of the IRA’s most significant changes to clean-energy tax credits allows those credits to be conveyed to third-party entities through “transferability,” which among other things allows the sale or assignment of tax credits earned by tax-exempt organizations that would otherwise be unable to use them. Companies should inquire about the availability and distribution of such credits prior to finalizing any agreement involving clean-energy projects.
The IRA also allows for direct payments to project participants in lieu of tax credits. While such payments are largely limited to tax-exempt and governmental organizations, for the first five years the IRA allows direct payments to any project participant entitled to the new Clean Hydrogen Production Tax Credit, the new Advanced Manufacturing Production Tax Credit, or the Carbon Capture and Sequestration Tax Credit. The specifics of how projects qualify for these credits is beyond the scope of this post; check with your attorney to see if a potential project might qualify your company for direct payments.
One caveat is that the IRA slashes 80% of its tax-credits’ value if the project at issue fails to meet prevailing wage and apprenticeship requirements. Any agreement involving the transfer of such credits should ensure that the project meets (and will continue to meet) those requirements. The only exemptions apply to facilities with a maximum net output of less than 1 megawatt entitled to the Renewable Electricity Production Tax Credit, Energy Investment Tax Credit, new Clean Electricity Investment Tax Credit, or Production Tax Credit; such facilities’ credits are always full value.
The downside to tax credits has always been their instability (the government’s policies towards them often change) and their somewhat-limited usefulness (only entities that pay the relevant tax benefit from them). The IRA intends to change companies’ approach to tax credits by addressing those drawbacks. While caution is always warranted, if your company has the opportunity to take advantage of the changes these augmented credits could make the difference in project profitability.