On July 27, 2022, U.S. Senate Majority Leader Chuck Schumer (D-N.Y.) and Sen. Joe Manchin (D-W.V.) introduced the Inflation Reduction Act of 2022, which proposes new and revised tax incentives for clean energy. The bill incorporates many, but not all, of the original proposals from last year’s Build Back Better Act.
Notable highlights of the bill include the following:
- Extension and Modification of ITC and PTC. The bill would extend the Section 45 production tax credit (PTC) and the Section 48 investment tax credit (ITC) for projects that begin construction before Jan. 1, 2025. The current phaseout for ITC and PTC would be removed; however, the current phaseout would continue to apply for any project placed in service before Jan. 1, 2022. The PTC for solar projects would be reinstated for projects beginning construction before Jan. 1, 2025. Projects would need to satisfy prevailing wage and apprenticeship programs to qualify for the 100% credit; otherwise, only a 20% credit would apply (see below).
- Technology-Neutral Tax Credit. The bill would provide for an emission-based, technology-neutral tax credit for the production of clean energy for projects that are placed in service in 2025 or later and on which construction begins before Jan. 1, 2033, but only for facilities with zero or net-negative carbon emissions. Taxpayers would have the option to choose between a technology-neutral ITC or PTC.
- Prevailing Wage and Apprenticeship Requirements. To qualify for the full credit rates, a taxpayer would need to (1) pay prevailing wages at the local rate for the construction and maintenance of facilities and (2) ensure that no fewer than the applicable percentage of total labor hours are performed by qualified apprentices. If these requirements are not met, the PTC and ITC would be subject to an 80% reduction (i.e., the base rate). However, for facilities not in service prior to Jan. 1, 2022, and on which construction begins prior to the date that is 60 days after the IRS issues additional guidance with respect to the prevailing wage and apprenticeship requirements, the full credit rate would still apply even if the prevailing wage and apprenticeship requirements are not satisfied.
- Stand–Alone Storage. The bill would adopt a stand-alone ITC for storage facilities with a capacity of at least 5 kWh whose construction begins before Jan. 1, 2025. The bill does not include an ITC for transmission property but would extend the ITC for certain costs associated with the construction of interconnection equipment installed in connection with other ITC-eligible facilities.
- Direct Pay. While the Build Back Better Act included a direct-pay election that would have allowed taxpayers to receive a cash refund, the new bill generally would limit direct pay to certain tax-exempt and governmental entities. The direct-pay election would be available to taxpaying entities in restricted situations, including with respect to the clean hydrogen production credit, the carbon sequestration credit and the advanced manufacturing production credit. The ability to elect direct pay for certain credits would be tied to the satisfaction of domestic content requirements. The direct-pay election would be made on a facility-by-facility basis and generally would have to be made in the year the facility is placed in service.
- Transfer of Credits. In lieu of the direct pay for taxable owners of renewable projects, the bill introduces a credit-transfer provision, whereby taxpayers could elect to transfer the PTC and ITC tax credits to unrelated taxpayers. Any consideration paid in respect of the transferred credit would have to be paid in cash and penalties may apply if the claimed credit amount is excessive. Compensation received by the transferor in connection with the transfer would not be taxable and the transferee could take no expense deduction. Once credit is transferred, the transferee could not further transfer the relevant credit. Credits that were carried back or carried forward could not be transferred.
- Bonus for Domestic Content and Energy Communities. The bill would maintain the 10% domestic content bonus for both the PTC and ITC, and a 10% bonus for projects built in certain energy communities with ties to traditional energy resources. To qualify for the domestic content bonus, the taxpayer would have to certify that any steel, iron or manufactured product that is a component of the facility was produced in the United States. For this purpose, a manufactured product would be deemed to have been produced in the United States if not less than the “adjusted percentage” of the total costs of all such manufactured products is attributable to manufactured products (including components) that are mined, produced or manufactured in the United States. An energy community is defined to include (i) a brownfield site; (ii) a census tract or any adjoining tract in which a coal mine closed after Dec. 31, 1999, or a coal-fired electric power plant was retired after Dec. 31, 2009; and (iii) an area that has (or, at any time during the period beginning after Dec. 31, 1999, had) significant employment related to the extraction, processing, transport or storage of coal, oil or natural gas. For projects beginning construction in 2024 and later, a 10% reduction in the tax credit would apply if they do not meet minimum domestic content requirements.
- Increased ITC for Investments in Low-Income Communities. Projects receiving an allocation of environmental justice solar and wind capacity limitation could receive an additional 10% credit if located in a low-income community or on Indian land, or an additional 20% credit if such project is part of a qualified low-income residential building project or qualified low-income economic benefit project.
- Extension of Carbon-Capture Credit. The credit for carbon-capture sequestration facilities would be extended to projects beginning construction before Jan. 1, 2033. The minimum carbon-capture requirements for treatment as a qualified facility would be lowered. The Section 45Q credit amount would follow a structure similar to PTC, based on prevailing wage, apprenticeship and domestic content requirements.
- Phaseout of PTC and ITC. The technology-neutral PTC and ITC would begin to phase out for projects beginning construction in the first calendar year after the later of (i) 2032 or (ii) the calendar year in which the IRS determines that the annual greenhouse gas emissions from the production of electricity in the United States are equal to or less than 25 percent of the annual greenhouse gas emissions from the production of electricity in the United States for calendar year 2022. In the next three calendar years after the applicable year, the PTC or ITC would be reduced to 100%, 75% and 50% of the base rate, respectively. Thereafter, the PTC and ITC would no longer be available.
- Clean Hydrogen Production Credit. The bill would create a new PTC for clean hydrogen produced after Dec. 31, 2022, by a taxpayer at a qualified clean hydrogen production facility. The credit would apply to facilities that begin construction before Jan. 1, 2033. Taxpayers would have the option to make an election for the ITC in lieu of the PTC.
- Nuclear Power Production Credit. A PTC would be available for the production of electricity from a nuclear facility (other than an advanced nuclear power facility under Section 45J) that is placed in service before the date of enactment. To be eligible, the electricity would have to be produced and sold to an unrelated person after Dec. 31, 2023. The credit would terminate for taxable years beginning after Dec. 31, 2032.
The proposed changes to the tax law are subject to further modification as the draft legislation progresses through Congress. It is unclear at this time what tax changes will be enacted in final form by Congress and ultimately signed into law.
The Senate plans to vote on the bill during the week of Aug. 1, 2022. If the Senate passes the bill by Aug. 7, the House will need to return to vote on the bill during the middle to last half of August.