On July 27, 2022, Majority Leader Schumer (D-NY) and Senator Manchin (D-WV) released the Inflation Reduction Act of 2022 (the “Act”), a reconciliation package designed to address climate change, taxes and health care, including establishing a 15% corporate minimum tax, tightening of the carried interest rules to tax gains of asset managers, and extending and expanding available tax incentives for clean energy. The Act must pass both the House and the Senate and is expected to be put on the Senate floor for a vote as early as the end of this week, where it will need the vote of every Democratic senator to pass.
This alert summarizes the highlights of the clean energy provisions in the Act, which include tax incentives for renewable energy, such as wind and solar, as well as clean energy activities such as carbon capture and low-carbon hydrogen production. The Act would revive certain clean energy provisions first seen in H.R. 5376, the House bill previously known as the Build Back Better Act (the “BBBA,” discussed by us here), and the Senate Finance Committee’s updates to the BBBA (discussed by us here).
Two-Tiered Incentives Structure
As first proposed by the BBBA, the Act structures various tax credits in two tiers: a base rate and, if certain requirements are satisfied, a higher rate that is quintuple the base rate.
The higher rate generally applies only to those projects which meet the prevailing wage and apprenticeship requirements during applicable periods or satisfy certain other exceptions. Projects which are exempted from the prevailing wage and apprenticeship requirements and, thus, also qualify for the higher rate, generally include (1) where applicable, projects with a maximum net output of less than one megawatt (as measured in alternating current) and (2) projects which begin construction prior to the 60th day after Treasury issues guidance regarding the prevailing wage and apprenticeship requirements.
Under the “prevailing wage requirements,” the taxpayer must ensure that laborers and mechanics employed by contractors and subcontractors working on the construction of the facility, and in many cases its alteration or repair for a period of years after construction, are paid not less than the prevailing wages in the locality in which such facility is located as determined by the Secretary of Labor. Under the “apprenticeship requirements,” the taxpayer must ensure that no fewer than the applicable percentage (10% for projects which begin construction in 2022, 12.5% for 2023, and 15% thereafter) of total labor hours of the construction, alteration and repair work are performed by qualified apprentices (generally, employees participating in a registered apprenticeship program). Both requirements have certain cure provisions and the apprenticeship requirement includes a “good faith efforts” exception.
Enhanced Credits for Domestic Content, Energy Communities, and Low-Income Housing
For certain types of credits, such as the production tax credit under Section 45 (the “PTC”) and the investment tax credit under Section 48 (the “ITC”), an additional credit amount is available if the “domestic content requirements” are satisfied. Under the domestic content requirements, the taxpayer must ensure that any steel or iron, or a sufficient portion of manufactured product, that is a component of the qualified facility or energy property, as applicable, is produced or deemed produced in the United States. Manufactured products are deemed produced in the United States if not less than an applicable percentage, ranging from 40% (20% for offshore wind) of the total costs for construction beginning before 2025 to 55% of costs for construction beginning after 2026 (2027 for offshore wind), of all manufactured products of …….