Tuesday Feb 07, 2023

Inflation Reduction Act of 2022: The energy tax provisions you need to know about – Eversheds Sutherland(US) LLP


The Inflation Reduction Act of 2022 (the Act) runs 725 pages and includes numerous energy tax provisions aimed at enhancing US. energy security. The Act, if enacted, would extend and expand the renewable and alternative energy tax credits, shift to technology neutral credits in 2025, provide for US energy component manufacturing credits and modify the rules for electric vehicle tax credits. Buckle up as we breakdown the 300 plus pages of energy tax related provisions.

New concepts

The Act contains several new concepts that apply across numerous credits. When evaluating the applicability of many of the credits provided for in the Act, taxpayers will need to be aware of the following. We therefore begin with these new concepts.

Prevailing wage and apprenticeship requirements

Certain credit provisions provide that only 1/5th of the credit amount is available unless one of the following is satisfied:

  1. The facility’s maximum net output is less than 1 MWac;
  2. Construction of the facility began prior to (or within 60 days after) the release by Treasury or the IRS of guidance for the implementation of the prevailing wage and apprenticeship requirements; or
  3. The prevailing wage and apprenticeship requirements are satisfied.

Generally, to meet the prevailing wage requirement, laborers and mechanics employed by contractors and subcontractors in construction and alteration or repair of a facility must be paid wages not less than prevailing rates as determined by the Secretary of Labor. The apprenticeship requirement generally requires that (1) certain labor hour requirements for the construction, alteration or repair work with respect to the facility must be performed by apprentices and (2) for contractors with more than four employees, one in every four employees employed by contractors or subcontractors must be a qualified apprenticeship. Failure to satisfy the wage and apprenticeship requirements may be cured through additional payments to the affected workers and to the government. These requirements vary slightly for different credits and exceptions apply.

ES Observation: Since the prevailing wage and apprenticeship requirement is deemed satisfied if construction begins before (or within 60 days after) Treasury or the IRS releases guidance on these requirements, there remains an incentive to begin construction earlier than the extended deadlines for beginning construction (as discussed below). For taxpayers needing to comply with these requirements, practical guidance from Treasury and IRS implementing these rules will be critical. For example, it is unclear how a taxpayer can reasonably utilize the cure provisions without having direct access to employee information (including name, contact information and wages) of contractors and subcontractors. We expect this guidance to be the subject of substantial input from industry.

Energy community bonus credit

Certain bonus credits may be available for facilities constructed in an energy community, which includes brownfield sites, areas with significant employment (post-1999) related to extraction, processing, transport, or storage of coal, oil or natural gas, or any census tract (or adjoining tract) that had either a coal mine close after 1999 or coal-fired electric generating unit retired after 2009.

ES Observation:  The IRS will need to provide guidance regarding the relevant criteria for determining what constitutes “areas with significant employment.”  

Domestic content requirement

Bonus credits also may be available …….

Source: https://us.eversheds-sutherland.com/NewsCommentary/Legal-Alerts/252759/Inflation-Reduction-Act-of-2022-The-energy-tax-provisions-you-need-to-know-about

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