The Inflation Reduction Act of 2022 (IRA) includes the largest clean energy incentive effort in U.S. history. It builds on the energy initiatives included in 2009’s American Reinvestment Recovery Act, creating an environment where many energy-related projects become significantly more attractive to more types of entities than ever before.
The IRA’s 70 investment, production, and excise tax credits represent a financial offset for an entity’s qualified construction, manufacturing, or production costs. These offsets make the economics of many projects work better than they would without the credits, including projects in the power industry.
In addition, the base credit available for specific projects can be multiplied if certain conditions are met. To maximize any credit, entities will have to prioritize existing and future projects, adjusting the timetable, location, and production processes if possible. They will be doing this without complete guidance, since, as of this writing, the IRS has yet to issue guidance that will clarify key terms and deadlines to qualify for credits.
Because the intent of the law is to promote transition from fossil fuels, it will affect an entity’s approach to natural resource sustainability, environmental, social or governance (ESG) initiatives, or adoption or creation of renewable energy.
The IRA includes new credits for qualifying biogas initiatives, solar, sustainable aviation fuels, clean hydrogen, zero-emission nuclear, clean transportation fuels, energy efficiency construction, electric vehicles (EVs), and EV infrastructure. Projects related to smart grids, energy resiliency, decarbonization, and electrification of resources are all eligible for one or more credits.
The law encourages more investment in domestic energy production and manufacturing, and aims to reduce carbon emissions. Anyone with expenditures for a capital project can benefit from the IRA’s tax credits. Companies and organizations in the power industry should review their list of capital projects and consider questions such as:
■ Does your capital project involve developing strategies to reduce reliance on carbon-based energy sources?
■ Can you adapt the project to make it more energy-efficient?
■ How can you implement procedures to reduce your carbon footprint?
■ What can you do to reduce reliance on fossil fuels and be more committed to your organization’s corporate sustainability or ESG strategy?
■ Are you building products that support the renewable energy space?
■ Are you creating renewable-based fuels?
■ Are you doing things that sequester or limit the release of carbon into the environment?
Checking a list of current projects against the IRA’s list of credits may cause an entity to reprioritize its project list, move up deadlines to begin construction, or delay other projects.
The next steps are basic to most tax credits in the IRA: originating, preserving, maximizing, and protecting them. The specifics of how to do each of these are still dependent on the IRS guidelines that have not been issued.
Originating a Tax Credit. An entity or individual originates an IRA tax credit when they spend money on a qualifying energy property or product.
Preserving a Tax Credit. Each type of IRA tax credit has differing amounts, time periods, and thresholds a taxpayer must meet to qualify for the credit. Here’s an example of preserving a credit: If an entity “begins construction” on a qualifying project within 60 days of the IRS issuing guidance on prevailing wage and apprenticeship requirements, that project will qualify for a 30% investment tax credit without needing to meet prevailing wage and apprenticeship requirements. That credit is “preserved.” On the other hand, if a project is commissioned and put into service too early, it may not qualify for a tax credit. So, in some instances, an organization may want to delay a project until it qualifies for a credit.
Maximizing a Tax Credit. Each credit starts with a base amount, but those amounts can multiply under certain circumstances. For example, if a project is built in an “energy community” where job loss is likely because of the shift away from traditional energy sources like coal and oil, variables like this can result in a materially increased credit to be received.
Protecting a Tax Credit. This step is mainly ensuring that the taxpayer has originated, preserved, and maximized a credit following all IRS rules, which protects against the IRS trying to recapture the credit paid if an entity is found to be out of compliance, as an example.
Timing Is Critical
To protect and enhance credit opportunities, time is critical for projects that are currently in process or close to kicking off. Depending on the type of project an entity is considering, there can be significant differences in the amount of a credit for projects that begin before the end of 2022 and those that don’t start until 2023 or later.
What should organizations be doing now to ensure they are able to access available credits? Begin by looking at capital budgets for the upcoming year(s) and determining if any planned projects or expenditures could be impacted by aspects of the IRA. Given project timing, organizations may need to execute steps now to preserve and maximize available funding. Timing is critical in the power industry—and the time to act is now to protect credits through “safe harbor” provisions related to prevailing wage, apprenticeship, and begun construction strategies.
—Thomas Unke is a partner and the firm leader of Baker Tilly’s energy and utilities practice.