Major Tax Provisions in the Inflation Reduction Act

Earlier this week, the Inflation Reduction Act  (Act) passed all Congressional hurdles and is expected to be signed into law by President Biden in the coming days. Passed through the budget reconciliation process, it’s less expensive than the Build Back Better Act, which is where most of the provisions started. Still, it is the single biggest climate action bill to date with additional measures to lower healthcare costs. Controlling two highly volatile cost centers – healthcare and energy – is thought to dampen the effects of inflation, though experts disagree on the extent.

To stimulate individual and business energy efficiency, the Act makes changes to several existing tax credits, extends others, and adds new tax incentives. Most of the revenue to pay for the extra tax breaks will come from a minimum corporate tax on book income and stepped-up IRS enforcement. Since the changes are quite comprehensive, Wilson Lewis has provided a summary of the key energy efficiency tax changes below.

Energy Tax Credits and Extenders

Clean and renewable energy sources are the clearest winners.  As most of the tax incentives lie in energy efficiency and climate-related areas, the Act is expected to reduce U.S. emissions by 25 to 40 percent by 2030. Popular business energy tax incentives have been expanded and modified, including:

• Starting in 2023, there will be a higher deduction amount for Sec. 179D, with new prevailing wage requirements.
• The R&D tax credit has been expanded for small businesses. Currently, small businesses and startups can claim Sec. 41 against up to $250,000 in payroll taxes, which has now been increased to $500,000.
• The Section 45L energy-efficient home tax credit has also been expanded to $2,500, or $5,000 for net zero energy homes. The bonus amount for multi-family homes is still available but will be tied to prevailing wage requirements.

Commercial Clean Vehicle Credit

Businesses can receive a $7,500 tax credit for the purchase of electric or other qualified clean vehicles weighing under 14,000 pounds. For larger purchases, vehicles weighing over 14,000 pounds, the credit value increases to 440,000.

Alternative Fuel Refueling Property (Charging Stations)

There is an extended federal tax credit available to businesses that place new alternative fuel refueling property into service before 2033. The Act increases the credit to 30% of eligible property up to $100,000. The credit amount reduces to 20% for property values over $100,000.

Production and Investment Tax Credits

Production tax credits for renewable power sources have been extended and, in some cases, enhanced. “Current law provides a[n inflation-adjusted] production tax credit (PTC), at a rate of 2.5 cents or 1.3 cents per kilowatt hour (kWh) depending on the technology used, for the first 10 years of production at qualifying renewable electricity production facilities that began construction before 2022.”

The PTC has been extended to 2025 for wind, biomass, geothermal, solar, landfill gas, trash, qualified hydropower, and marine and hydrokinetic resources. Solar power PTCs previously expired in 2005.

Investment tax credits (ITCs), which are based on the upfront capital cost to build the facility, are currently available on a temporary basis for certain types of energy property. Generally, investment tax credits are now extended through 2024 at a base rate of six percent for solar, fuel cells, waste energy recovery, combined heat and power, small wind property, and two percent for microturbine property. ITC amounts can be increased substantially for projects paying the prevailing wage.

Onshore and offshore wind facilities can also qualify for both types of tax credits if construction on the facility starts before 2034. Smaller facilities may also become eligible.

Hydrogen

Section 45V, a new production tax credit for qualified clean hydrogen, applies to eligible facilities producing or selling qualified clean hydrogen starting in 2023. The Sec. 45V tax credit would apply for ten years beginning on the date the facility is placed in service. The amount of the credit depends on the facility’s lifecycle greenhouse gas emissions and ranges from 20 percent to 100 percent. Any credit amount can be increased by up to five times its original value if the facility adheres to federal wage and apprenticeship standards.

Hydrogen facilities also have the option to claim an ITC instead.

Carbon Capture & Storage

Section 45Q, a tax credit for carbon capture and storage, has been extended and expanded. It is now available for projects that start construction before 2033 at a higher rate. Further, the threshold for carbon dioxide capture has been decreased, allowing more facilities to potentially claim the credit. Direct air capture systems can result in a higher tax credit.

Advanced Manufacturing

Section 48C, an investment tax credit, and Section 45X, an advanced manufacturing production tax credit, have been reinstated and added, respectively, to spur production on advanced energy and manufacturing projects. Eligibility would require companies to produce and source certain components in the U.S.

Nuclear Power

A new tax credit for zero-emission nuclear power production facilities has been created. Qualifying facilities are:

• Already placed in service
• Taxpayer-owned
• Producing and selling nuclear power after December 31, 2023
• Did not previously qualify for the Sec. 45J tax credit

Like many other energy-related tax credits, this production tax credit would expire at the end of 2032.

Monetized Tax Credits

Some of these tax credits can be monetized. Refundable tax credits would include energy, carbon capture, manufacturing, and fuel production, starting in 2023. Tax-exempt government entities and corporations are eligible. Taxpayers prohibited from claiming refundable tax credits would be allowed to sell all or part of the credit for cash.

Superfund

The Superfund tax on crude oil and imported petroleum has been increased from 9.7 to 16.4 cents per barrel. Superfund taxes had expired in 1995.

Contact Us

Once the Act is signed into law, Atlanta companies will need to wait until the IRS and Treasury provide needed guidance before these lucrative incentives can be claimed. If you have questions about the information outlined above or need assistance with an accounting or tax issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.