Yesterday, we continued reviewing the key energy and climate provisions of the American Inflation Reduction Act of 2022. Today, in this fourth and last instalment, we address the Act's focus on Tax Credits, and provide a conclusion to this bulletin series.
L. Tax Credits.
Some of the most transformative aspects of the IRA operate through the tax code, with a series of new, expanded, or otherwise modified tax credits to incentivize zero-carbon energy and energy efficiency. For many of these tax credits, a "direct pay" provision would authorize payment of the tax credit directly to the taxpayer in situations where a taxpayer doesn't have sufficient tax liability to fully utilize the tax credit. The current system, which provides tax credits to specific energy production technologies transitions to a new technology-neutral system starting in 2025, which will continue until the emissions from the nation's electricity sector reach 25% of 2022 levels. Some of the most significant tax changes are as follow:
- Changes to the Section 45 production tax credit (PTC). The IRA amends the tax code to rework and expand the Section 45 PTC. It extends the eligibility date to facilities that begin construction by January 1, 2025 (the current program expired on January 1, 2022). The base credit amount of 1.5 cents/kWh would be provided only to facilities that pay prevailing wages for construction, repair, or expansion of the facility and meet apprenticeship requirements. (Other facilities get a lower 0.3 cents/kWh.) The amount of the tax credits increases even more if the manufacturer uses American-made steel and components, and can go higher still for projects constructed in "energy communities" (e.g., brownfields and communities that have or had significant employment in the fossil fuel industry or which have experienced the closure of a coal mine or coal-fired plant). Another bonus PTC (10-20%) is available for wind or solar facilities constructed on low-income housing or Indian lands, with some limits on capacity for eligibility. The PTC would also be fully available for new hydropower added to non-power dams or incremental increases in hydropower production from existing hydropower projects, for marine hydrokinetic technology, and for generators placed in irrigation or domestic water pipelines.
- Changes to the Section 48 investment tax credit (ITC). The IRA extends the sunset dates to encompass most projects that begin construction by January 1, 2025. Groundwater-sourced heat pumps and cooling systems are eligible for longer. As with the PTC, the full tax credits are now provided only for technologies that meet prevailing wage and apprenticeship requirements. (Otherwise the tax credits are substantially lower.) And as with the PTC, energy properties that meet specified domestic content requirements receive a bonus credit (2-10%), and further bonus credits are available for energy projects in the same "energy communities" discussed with the PTC. Other technologies that had previously only been eligible for a 10% ITC are now eligible for the standard 30% ITC, including geothermal, energy storage systems, microgrids, combined heat and power systems, small wind systems, certain fuel cells, facilities that convert biomass into methane for commercial use, building heating and cooling systems that store thermal energy, and others. The ITC can also be used for interconnection facilities, not just the relevant energy projects.
- Key changes to the Section 45Q credit for carbon capture and sequestration (CCS). The IRA would significantly extend the eligibility date to facilities that begin construction before January 1, 2033. More facilities would now be eligible for the CCS tax credit as well. Smaller-scale direct air capture facilities could also now qualify, as long as they capture at least 1,000 metric tons per year. The qualifying thresholds for CCS associated electricity generators and other industrial facilities are also reduced. The IRA would enact new baseline credits for each metric ton of carbon captured, including for direct air capture. And just like with the PTC and ITC, the potential tax credits increase substantially (in the Section 45Q case, by 5x) for projects that meet prevailing wage and apprenticeship requirements.
- New Section 45U tax credit for nuclear power. The IRA would also create a new "zero-emission nuclear power" credit of 0.3 cents/kWh of electricity sold from existing nuclear reactors. The tax credit would last through December 31, 2032. It does not apply to reactors that qualify for the advanced nuclear tax credit, and it also is increased by 5x if the taxpayer meets prevailing wage requirements.
- New 45Y technology-neutral PTC. The IRA would create a new technology-neutral tax credit structure for facilities that produce zero-GHG electricity (on a net basis) and that are placed in service after December 31, 2024. The base credit would be 0.3 cents/kWh, but that would rise to 1.5 cents/kWh if the producer meets prevailing wage and apprenticeship requirements (subject to inflation adjustments). The tax credit would be 10% higher for generators located in "energy communities," and another 10% higher if the generator meets domestic content requirements. The credits are available for 10 years after electricity production begins. The technology-neutral credit would begin to phase out in 2032, or earlier if before then the electric power sector achieves 25% reductions in GHG emissions compared to 2022 levels.
- New 48D technology-neutral ITC incentivized for environmental justice communities. The IRA would create a technology neutral ITC for net-zero electric generators and energy storage facilities placed in service after December 31, 2024. As with the technology-neutral PTC, the tax credit could be up to 5x higher if the facility meets prevailing wage and apprenticeship requirements, with additional bonus credits for investments in energy communities, and for facilities meeting domestic content requirements.
- The phase-down structure would also track the phase-down for the 45Y technology-neutral PTC. A bonus credit of 20% would be available on a limited basis for facilities that are constructed in environmental justice communities (although halved if the facility does not meet prevailing wage and apprenticeship requirements).
- Tax credits for buildings. The IRA would
expand or change numerous tax credits related to buildings:
- Clean energy and energy efficiency tax credits for individuals. The IRA would extend certain energy efficiency tax credits through 2032, including those related to installation of energy efficient doors, windows, roofs, etc.; the installation of heat pumps and biomass stoves; and for home energy audits. Individual tax credits for residential renewable energy systems (e.g., rooftop solar) would be extended through 2034, although with phase-down beginning in 2032. Home battery storage systems would also be eligible for tax credits.
- Commercial building energy efficiency. Tax credits would be available on a per square-foot basis (up to $1/square foot) for buildings that that achieve certain energy cost savings over a baseline. Those tax credits can be even higher (up to $5/square foot) if the building was installed with labor paid prevailing wages and meeting apprenticeship requirements.
- Energy efficiency credit for new homes. The IRA would extend the sunset date of this tax credit through the end of 2032. Tax credits of $500–$5,000 would be available for new construction of residential homes, based on the level of Energy Star rating achieved. As with many other tax credits under the IRA, the base rate could be increased substantially (up to 5x) if construction practices meet prevailing wage and apprenticeship requirements.
- Tax credits for vehicles and fuels. In recent
years mobile sources like cars and trucks have surpassed the
electric power sector as the largest source of GHG emissions in the
U.S. The IRA would enact or expand numerous tax credits related to
vehicles, particularly credits that would incentivize
electrification of the sector.
- Clean vehicle tax credit. The IRA would amend existing provisions of the tax code to establish a baseline tax credit of $7,500 per vehicle and extend the availability of the tax credit through 2032. Half of that credit ($3,750) would be available only if the vehicle's battery meets critical minerals [The critical minerals in question are listed in the IRA: Aluminum, Antimony, Barite, Beryllium, Cerium, Chromium, Cobalt, Dysprosium, Europium, Fluorspar, Gadolinium, Germanium, Graphite, Indium, Lithium, Manganese, Neodymium, Nickel, Niobium, Tellurium, Tin, Tungsten, Vanadium, Yttrium.] limits that get more restrictive between now and 2027.
- The other half of the credit would depend on whether the battery was manufactured or assembled in North America and the degree to which the automaker's fleet manufactures batteries in the U.S. This requirement would initially require the automaker to use batteries made or assembled in North America for 50% of its electric vehicle fleet, increasing gradually to 100% North America requirement by 2029.
- Critically, the IRA eliminates the per-manufacturer limit on credits, which had previously limited companies like Tesla, GM, and Toyota that had either exceeded the limit on qualifying electric vehicles (EVs) or were at risk of soon exceeding that limit.
- The IRA would also provide a new tax credit for used EVs of up to $4,000 (although not greater than 30% of the sales price).
- There are various exceptions where the tax credits would not be available. Beginning in a few years, certain EVs would not be eligible for the tax credit if their batteries contain critical minerals or components associated with an "entity of foreign concern." Taxpayers with an adjusted gross income above $150,000 (or above $300,000 for married couples) would not be eligible. And vehicles with a manufacturer's suggested retail price (MSRP) above certain thresholds would also not be eligible.
- The IRA would also expand vehicles eligible for tax credits to include vehicles powered by fuel cells.
- New 45W credit for commercial clean vehicles. The IRA would create a new tax credit for clean vehicles purchased by commercial entities, limited to $7,500 for smaller vehicles (less than 14,000 pounds gross vehicle weight) and $40,000 for larger vehicles. This tax credit would sunset at the end of 2032.
- Tax credit for alternative fuel refueling stations in rural or low-income areas. The IRA would raise the limit on tax credits for alternative fuel refueling stations and add further credits if the facility meets prevailing wage and apprenticeship requirements. These refueling stations would have to be constructed in either a rural census tract or a low-income census tract. EV charging stations would be authorized to provide bi-directional charging equipment so that electricity can be delivered from the EV battery to the grid as well as from the grid to the recharging battery.
- Extension of renewable and alternative fuel tax credit. The IRA would extend tax credits for biodiesel, renewable diesel, alternative fuels, and second generation biofuels to the end of 2024.
- New 40B tax credit for sustainable aviation fuel. The IRA would create a new credit for use of sustainable aviation fuel, starting at $1.25 per gallon, and sun-setting at the end of 2024. The new tax credit would increase by 1 cent for each percentage point above 50% that the sustainable aviation fuel reduces life-cycle GHG emissions compared to traditional aviation fuel. The credit can be used in conjunction with other alternative fuel, and airlines could deduct the credit directly from their gross income.
- New 45V clean hydrogen tax credit. The IRA would establish a new tax credit for production of "clean hydrogen" (i.e., hydrogen produced with no more than 4 kilograms of CO2E emitted per kilogram of hydrogen). These 45V tax credits range from $0.012 to $0.60 per kg, depending on the GHG intensity of hydrogen production. A significant multiplier is available if the hydrogen fuel is produced in a U.S. facility that meets prevailing wage and apprenticeship requirements. The 45V can be used in conjunction with the PTC and ITC (e.g., the PTC if renewable energy is used to produce clean hydrogen).
- New 45Z clean fuel production tax credit. The IRA would establish a new production tax credit for clean fuels depending on the GHG intensity of the fuel. The rate for most clean fuels would begin at $0.20 per gallon (adjusted by the GHG intensity), but would begin at $1 per gallon if the fuel producer meets prevailing wage and apprenticeship requirements. Renewable aviation fuels receive a base rate of 35 cents per gallon, adjusted to $1.75 per gallon if prevailing wage and apprenticeship requirements are met. These credits would sunset at the end of 2027.
- Extension of advanced energy project tax credit. The IRA would allocate $10 billion for advanced energy project tax credits, with at least $4 billion allocated to "energy communities" (current allocation is $2.3 billion). These include recycling facilities and certain manufacturing facilities like those that manufacture hydropower equipment; that make or blend low-carbon fuels; that produce hybrid and fuel cell vehicles or components; existing manufacturing facilities that are re-equipped with CCS equipment, zero- or low-carbon process heat systems, energy efficiency, or waste reduction processes; and facilities for the production or recycling of critical minerals.
- New 45X advanced manufacturing production credit. The IRA would create a new production tax credit for advanced manufacturing of a variety of specific solar, wind energy, and battery components.
- Extension of the Superfund tax. The bill would reinstate the Superfund tax on certain crude oil and petroleum products, and increase the tax rate to 16.4 cents per barrel (up from 9.7 cents). The reinstated portion of the tax would apply to crude oil received at a U.S. refinery and to petroleum products entering the U.S. for consumption, use, or warehousing. That tax rate could increase further beginning in 2023 based on a new provision that provides for inflation adjustment. The bill would also allow companies to make advances to the Superfund itself for the first time in 27 years.
|The "Superfund" is the name commonly given to a U.S.
law passed in 1980 whose full name is the Comprehensive
Environmental Response, Compensation and Liability Act, a federal
law designed to clean up industrial sites contaminated by hazardous
The term Superfund Tax refers to an excise tax on chemicals.
Canadian Conclusion From Fasken
The effect of the IRA for Canadian businesses is its impact to act as a non-tariff barrier to accessing the US market: Canadian governments and industry will need to be more cognizant of US standards of production to reduce GHG emissions and adopt similar programs and standards or risk being shut out of the US market. Alternatively, industry may decide to cross over the US green wall and locate manufacturing capacity there to specifically address the US market. In light of the clear, concerted effort by the US to pump billions into the US market to reduce GHG emissions to specified targets, several considerations for Canadian businesses arise:
We invite you to reach out to the authors or your relationship contact at Fasken for more information on these issues, or for assistance or advice in designing a strategy for your business to navigate these fluid requirements for US market access.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.