Earlier today, the House of Representatives passed the Inflation Reduction Act of 2022 (the “Act”), which the Senate passed on August 7, 2022. President Biden has indicated that he will sign the Act into law.
The Act substantially changes and expands existing federal income tax benefits for renewable energy, including the existing Section 45 production tax credit (“PTC”) and Section 48 investment tax credit (“ITC”), and adds Section 45Y, the Clean Energy Production Tax Credit, and Section 48E, the Clean Electricity Investment Credit to the Internal Revenue Code. Combined, these provisions would, in effect, extend the ITC and PTC at their full credit rates for eligible facilities on which construction begins before 2034. The Act also includes direct-pay options for certain taxpayers, and permits most taxpayers to sell certain tax credits. These changes are discussed below.
The Act also contains other noteworthy changes, including expansions and amendments to the existing Section 45Q carbon oxide sequestration credit, the Section 30D clean vehicle credit, and credits for homeowners adding certain renewable energy and efficiency improvements to their homes, as well as new provisions aimed at mitigating the effects of climate change, such as a new clean hydrogen production credit. We will cover other changes in forthcoming blog posts.
Section 45: Production Tax Credit
The Act extends the current PTC framework for qualified facilities that begin construction prior to January 1, 2025, but (as with the ITC) implements a new structure with a “base credit amount” and “increased credit amount.” The base credit amount and increased credit amount, along with the requirements that must be satisfied to qualify for the increased credit amount, are described in detail below. Qualified facilities include wind, closed and open loop biomass, geothermal, landfill gas, trash, qualified hydropower, marine and hydrokinetic facilities, but note the base credit amount is reduced by one-half for open-loop biomass facilities, small irrigation power facilities, landfill gas facilities and trash facilities. Additionally, the Act reinstates the PTC for solar energy facilities, which were last eligible for the PTC if placed in service before 2006. Taxpayers that own qualified facilities are eligible for the PTC for electricity produced and sold during the 10-year period beginning on the date the facility was originally placed in service.
Determination of Credit Amount
Taxpayers are eligible for the increased credit amount, currently 2.6 cents per kWh of electricity produced and sold in 2022 (and subject to inflationary adjustments for future years), if construction of the facility begins prior to the date that is 60 days after the IRS releases guidance regarding the prevailing wage and apprenticeship requirements described below (such date, the “Act Beginning Construction Deadline”). As such, any facility that has already been placed in service this year or has yet to be placed in service may now qualify for the full increased credit amount if construction began on such facility prior to the Act Beginning Construction Deadline, including facilities intended to qualify for 60% of the full credit amount by beginning construction in 2020 or 2021. For facilities that were placed in service prior to January 1, 2022, the historical PTC phase-outs remain intact.
Facilities on which construction begins after the Act Beginning Construction Deadline will be eligible for the increased credit amount only if one of the following is satisfied:
- The facility has a maximum net output of less than 1 MW(AC), or
- Newly enacted prevailing wage and apprenticeship requirements are satisfied.
As such, once the Act Beginning Construction Deadline has passed, facilities larger than 1 MW(AC) that have not yet begun …….