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New Energy Tax Credits Under the Inflation Reduction Act

The Inflation Reduction Act (IRA) expanded the investment tax credits (ITC) available for production and conservation of energy and natural resources. The amount of the credit for a taxable year equals the applicable percentage multiplied by the basis of the energy property placed in service during the year.

The IRA created a two-tier rate structure. The base rate is between 2% and 6% for facilities placed in service after 2021, and the enhanced rate is 10% to 30% for facilities placed in service after 2021.

To qualify for the enhanced or bonus energy percentage (five times the base rate), the energy project must be: one with a maximum net output of less than 1 megawatt of electrical or thermal energy; one that begins construction before January 29, 2023 or one that satisfies the prevailing wage requirements and apprenticeship requirements (PWAR).

Prevailing Wage Requirements
The taxpayer must ensure that laborers and mechanics employed are paid at rates that are at least the prevailing rates for similar work pursuant to local guidelines as most recently determined by the Secretary of Labor.

Apprenticeship Requirements
To satisfy the apprenticeship requirements, the taxpayer must do all of the following:

  1. Satisfy the Apprenticeship Labor Hour Requirements, subject to any applicable Apprenticeship Ratio Requirements,
  2. Satisfy the Apprenticeship Participation Requirements and
  3. Comply with general record-keeping requirements under section 6001 and reg. 1.6001-1.

Additional Increase to Energy Credit
Two additional increases to the energy credit are also available: Domestic Content Requirement (DCR) and Energy Community (EC). Both of these allow for an additional credit of 10% for projects that satisfy the prevailing wage requirements and apprenticeship requirements, or 2% for projects that do not.

Domestic Content Rules
The domestic content rules are satisfied with respect to a qualified facility if the taxpayer certifies that any steel, iron or manufactured product that is a component of such facility was produced in the United States. There are several special rules regarding specific materials used, manufacturing processes and applicable percentages of domestic content.

Energy Community Rules
The federal government is providing addition- al incentives for investment in communities challenged by the transition to clean energy. These include brownfield sites, metropolitan statistical areas or nonmetropolitan statistical areas that meet employment or tax revenue thresholds related to extraction, processing or storage of coal, oil or natural gas and other employment rate requirements.

There are several beginning-of-construction and placed-in-service constraints, as well as others that should be reviewed with regard to energy property.

Stephen M. Gilman
Tax Partner

Marcum LLP
Boston, MA