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Subtitle D of the Inflation Reduction Act (IRA) is dedicated to energy security within the United States. One of the main ways that Congress intends to achieve this goal is by providing incentives to taxpayers to invest in, produce, and use cleaner energy from electricity to fuel and technologies to achieving efficiencies.
This article provides a detailed breakdown of the numerous tax credits included in the energy security subtitle of the Act.
Clean Electricity and Reducing Carbon Emissions
ProvisionPre-IRAIRAEffective DateCredit for Electricity Produced from Certain Renewable SourcesConstruction beginning before1/1/20221/1/20251/1/22Credit$.015/kWh$.015/kWh1/1/22Prevailing wage & apprenticeship requirementsNoYes1/1/22Domestic contentn/aAdditional 10%1/1/2023Energy communityn/aAdditional 10%1/1/2023Energy CreditEnergy CreditPIS before 1/1/2022PIS before 1/1/20251/1/2022Geothermal energy propertyn/a30% credit1/1/2022Energy storage technology, qualified biogas property, and microgrid controllers n/a10% credit 1/1/2023Prevailing wage & apprenticeship requirementsNoYes1/1/2022Solar and Wind Facilities Placed in Service in Connection with Low-Income CommunitiesLow-income communityn/a10%1/1/2023Low-income residential building project or economic benefit projectn/a10%1/1/2023Credit for Carbon Oxide SequestrationExtension1/1/20261/1/203312/31/2022Prevailing wage & apprenticeship requirementsNoYes12/31/2022Zero-Emission Nuclear Power Production CreditCredit raten/a$0.015/kWh12/31/2023 – 12/31/2032
The IRA extends and modifies the credit for electricity produced from certain renewable sources. It extends the timeline for beginning construction of a wind, solar, or geothermal facility that produces renewable electricity, making it eligible as a “qualified facility” for purposes of the Section 45 renewable resources credit. The credit amount ($.015 per kilowatt hour) remains the same. However, the Act also adds prevailing wage and apprenticeship requirements to the qualified facility provision, which, if not met, reduces the credit amount to $0.003 per kilowatt hour.
The prevailing wage requirement requires any laborer or mechanic employed by the taxpayer, contractor, or subcontractor in constructing the facility be paid at least the local prevailing rates for such work. The apprenticeship requirement requires that a certain number of individuals who are participating in a registered apprenticeship program must be working on the facility.
The credit is increased if the steel, iron, or manufactured product that is a component of the facility was produced in the United States. Moreover, the credit is also increased if the facility is located in an “energy community.”
The IRA also extends the timeline for certain property to qualify for the Section 48 Energy Credit and imposes the prevailing wage and apprenticeship requirements to qualify for an increased credit. Moreover, the Act reduces the base credit rates described in the section from 30% to 6% and from 10% to 2%, respectively; however, it does provide that those prior credit rates would continue to apply for qualifying energy projects that abide by the new prevailing wage and apprenticeship requirements.
Further, the provision adds geothermal energy property to the 6%/30% credit list and energy storage technology, qualified biogas property, and microgrid controllers (all property for which construction must begin before December 31, 2024) to the 2%/10% credit list.
Section 48 is further enhanced with a new subsection that provides an increased credit of an extra 10% for solar and wind facilities placed in service in a low-income community. It also provides for an additional 10% (total of 20% extra) if the facility is part of a low-income residential building project or economic benefit project.
The credit for carbon oxide sequestration is extended for an additional 7 years by including property for which construction begins before January 1, 2033.
The Act creates a new zero-emission nuclear power production credit which is equal to $0.015 multiplied by the kilowatt hours of electricity produced and sold by a qualified nuclear power facility.
ProvisionPre-IRAIRAEffective DateAlternative FuelsAlternative fuelsPIS before 1/1/2023Produced before 1/1/20251/1/2022Second generation biofuelProduced before 1/1/2022Produced before 1/1/20251/1/2022Prevailing wage & apprenticeship requirementsNoYes1/1/2022Sustainable Aviation Fuel CreditCredit amountn/a$1.251/1/2023 – 12/31/2024Gross income inclusionn/aYes1/1/2023Clean Hydrogen CreditCredit raten/a$0.601/1/2023Prevailing wage & apprenticeship requirementsNoYes1/1/2023
The IRS also incentivizes the investment in alternative fuels such as alcohol fuel mixture, biodiesel mixture, and other alternatives by extending the termination date of credits for such fuels until December 31, 2024. It also extends the credit for second generation biofuel to such fuel that is produced before January 1, 2025.
An entirely new credit has been created for sustainable aviation fuel produced, sold, and transferred in the United States. The credit is equal to $1.25 per gallon of sustainable aviation fuel in a fuel mixture that is produced and sold.
The Act contains a credit located in new Section 45V for the production of clean hydrogen during the ten-year period following the date a qualified hydrogen production facilities was placed in service. The credit is equal to the kilograms of qualified clean hydrogen produced by the taxpayer at a qualified clean hydrogen production facility multiplied by a certain percentage of $0.60—the percentage depends on the emissions rate of the production. Following the other credits, the credit is increased by a multiple of 5 if the prevailing wage and apprenticeship requirements are maintained.
ProvisionPre-IRAIRAEffective DateEnergy Efficient Home Improvement CreditExtension (expiration date)12/31/202112/31/20321/1/2022Credit Rate10%30%1/1/2023LimitationLifetimeAnnual1/1/2023Residential Clean Energy CreditExtension (expiration date)12/31/202312/31/20341/1/2022Battery Storage Tech Expense CreditNoYes1/1/2023Energy Efficient Commercial Buildings DeductionDeduction$1.80/sq ft$2.50/sq ft1/1/2023Prevailing Wage and Apprenticeship RequirementsNoYes1/1/2023Energy Efficient Building Retrofit DeductionNoYesPIS after 12/31/2022New Energy Efficient Home CreditExtension12/31/202112/31/20231/1/2022Available for Unit within BuildingNoYes1/1/2023Prevailing Wage RequirementNoYes1/1/2023
There is an extension and increase to the nonbusiness energy property credit (renamed the energy efficient home improvement credit)—which includes energy efficiency improvements and residential energy property expenditures. It also modifies the credit system from a lifetime limitation to an annual limitation to encourage individuals to continuously make energy efficiency investments in their homes.
An extension is also provided for the residential energy efficiency property credit (renamed the Residential Clean Energy Credit) to 2034 and adds a credit for expenditures related to installing battery storage technology at a dwelling that has at least a capacity of 3 kilowatt hours.
The Energy Efficient Commercial Buildings Deduction increases the deduction for property that is constructed following the prevailing wage and apprenticeship requirements.
An alternative deduction for energy efficient building retrofit property has been established. This provision provides a deduction for property that is modified to reduce a building’s energy use by at least 25%. Such property can be installed as part of interior lighting systems, heating, cooling, ventilation, and hot water systems, or the building envelope.
The legislation extends, increases, and modifies the new energy efficient home credit. This credit has historically been available as a general credit to developers of new construction that meets the energy efficiency requirements. Eligible contractors can now claim the credit on homes sold or leased through 2032, and the amount of credit has more than doubled. Further, the credit is modified to apply—at a lower rate—to purchases of a unit within a building that qualifies for the credit.
ProvisionPre-IRAIRAEffective DateClean Vehicle Credit
Max Credit (New Vehicle)$1.80$7,5001/1/2023Max Credit (Used Vehicle)$0.00$4,0001/1/2023Max Credit (Commercial)$0.00$7,5001/1/2023Manufacturer limitationYesNo1/1/2023 – 12/31/2032AGI limit (New Vehicle)n/a$300k/$225k/$150k1/1/2023AGI limit (Used Vehicle)
$150k/$112.5/$75k1/1/2023Alternative Refueling Property CreditExtension1/1/20231/1/20331/1/2023Prevailing Wage and Apprenticeship RequirementsNoYes1/1/2023
The credit that applies to new electric vehicles has been increased and a credit for used vehicles has been added. Moreover, the IRA removes the manufacturer limitation, and creates an adjusted gross income limit to qualify for both credits. There will be an MSRP limitation of $80,000 for SUVs, pickups, and vans and $55,000 for other vehicles. There is a North American final assembly requirement effective for vehicles sold after the date of enactment (a transitional rule applies where there was a binding contract to purchase a vehicle before the date of enactment). In addition, there are separate requirements for the source country for battery components and the critical minerals in the battery, which would phase in from 50% in 2023 to 100% in 2029.
The alternative fuel refueling property credit has also been extended 10 more years, but subjects business/investment use property to the wage and apprenticeship requirements in order to receive the full credit.
The IRA provides an additional allocation of up to $10 billion of credits for qualifying advanced energy project sponsors. Moreover, it alters the definition of a qualifying advanced energy project. The definition now includes facilities for recycling, water as an applicable renewable resource, components of various systems rather than just the system, electric and hybrid vehicles, and projects which re-equip facilities with equipment designed to reduce greenhouse gas emissions.
Alongside the CHIPS Act’s Advanced Manufacturing Investment Credit, the Inflation Reduction Act creates the Advanced Manufacturing Production Credit in new Section 45X. The new credit is a general business credit equal to the applicable rate for the type of component produced and sold by the taxpayer. The components range from wind and solar energy components to chemical inverters. The credit is phased out for components sold after December 31, 2029, through December 31, 2032 (100%, 75%, 50%, 25%, 0%).
ProvisionPre-IRAIRAEffective DateClean Energy Production/Investment CreditProductionn/a$0.03/kWh1/1/2025Investmentn/a30%1/1/2025Prevailing Wage and Apprenticeship RequirementsNoYes1/1/2025Phase Outn/a100%, 75%, 50%, 0%Beginning in 2033Cost Recovery for Qualified Facilities, Qualified Property, and Energy Storage TechnologyUseful Life for Qualified Facilitiesvarying5 years1/1/2025Clean Fuel Production CreditClean Fuel Creditn/a$1.00/gallon1/1/2025 – 12/31/2027Sustainable Aviation Fuel Creditn/a$1.75/gallon1/1/2025 – 12/31/2027Prevailing Wage and Apprenticeship RequirementNoYes1/1/2025
New sections 45Y and 48E provide credits for clean electricity production and investment, respectively. The clean energy production credit is based on kilowatt hours of electricity produced by the taxpayer at a qualified facility and sold to an unrelated person. A qualified facility for the purposes of these credits is one which is used for the generation of electricity, placed in service after December 31, 2024, and for which the anticipated greenhouse gas emissions rate is zero. Moreover, a facility can be a qualified facility only during the 10 years beginning on the date it was originally placed in service.
The clean energy investment credit provides a credit equal to an applicable rate multiplied by a taxpayer’s basis in qualified facilities or energy storage technologies that are placed in service after December 31, 2024. Energy storage technology is thermal energy storage property or property which receives, stores, and delivers energy for conversion to electricity (or, in the case of hydrogen, which stores energy), and has a nameplate capacity of not less than 5 kilowatt hours.
In addition to the credits provided for the qualified facilities, qualified property, and energy storage technology, as newly defined in Sections 45Y and 48E, the Act brings these definitions over into the accelerated depreciation provision of Section 168 and changes the recovery period of such property to 5 years. This change is fairly substantial because the facilities would have otherwise been characterized as nonresidential real property subject to a 39-year recovery period which is not eligible for bonus depreciation.
Lastly, the clean electricity and clean transportation section of the Act creates the clean fuel production credit in Section 45Z which is a credit for clean fuel—that which is suitable for use as a fuel in a highway vehicle or aircraft—produced and sold in the United States. This credit is equal to $1.00 (or $1.75 in the case of sustainable aviation fuel) per gallon of transportation fuel that is produced at a qualified facility multiplied by an emissions factor—the factor is lowered the more emissions the fuel produces.
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