Last Wednesday night, after weeks of negotiations, US Senators Joe Manchin and Chuck Schumer reached a deal on an energy and healthcare bill titled the Inflation Reduction Act of 2022 (the "Act").1 The Act includes extensive provisions relating to green energy tax incentives. Although these provisions incorporate the general tax credit framework from the previously released Build Back Better Act (the "BBBA"), there are a number of noteworthy deviations, some of which were largely unexpected.
Key green energy tax provisions are listed below, with a more detailed analysis following the bullet point outline.
- Extension of the solar investment tax credit ("ITC") and renewable electricity production tax credit ("PTC") for projects that begin construction before January 1, 2025.
- ITC and PTC reduction for projects that fail to satisfy prevailing wage and apprenticeship requirements, but deemed satisfaction of such requirements for projects that begin construction prior to the date that is 60 days after Treasury issues guidance related to these
- Bonus ITC and PTC for projects that satisfy certain domestic content requirements or that are located in "energy community" or low-income community areas.
- ITC expanded to standalone storage and limited interconnection property (but not transmission property more generally).
- Extension of the carbon capture credit for projects that begin construction before January 1, 2033, and expansion of the carbon capture credit and reduction of carbon capture
- Direct pay option for certain governmental and tax-exempt entities.
- Option for taxable entities to transfer the ITC and PTC to third parties for cash.
- 3-year carryback period for the PTC (but only for projects that are placed in service after December 31, 2022) and for the ITC.
- A 15% minimum tax on corporate taxpayers with adjusted financial statement income in excess of $1 billion, effective for taxable years starting after December 31, 2022, with the ability to apply the ITC and PTC to reduce up to 75% of the minimum tax in excess of $25,000.
- Projects placed in service after December 31, 2024, entitled to a new, technology-neutral investment tax credit and production tax credit regime. The new technology-neutral credits will be subject to phaseouts for projects beginning construction after the later of 2032 and the date certain emissions targets are satisfied.
- Extension of the tax credit for new electric vehicles for those placed in service after December 31, 2022, and elimination of the per-manufacturer limit. However, there will be an income limitation and a phased-in domestic content requirement for the electric vehicle battery. The new domestic content requirement is likely to substantially limit the usefulness of this credit.
- A new tax credit for purchases of used electric vehicles, which will also be subject to an income
- A new tax credit for commercial electric vehicles.
Extension and Modification of the PTC
The PTC would be extended to projects beginning construction before January 1, 2025.
The Act retains the substance of the revised PTC structure set forth in the BBBA. Specifically, the PTC would consist of a base credit in an amount equal to 20% of the available credit, an amount that would be multiplied by 5 if certain prevailing wage and apprenticeship requirements are satisfied. It should be noted that these prevailing wage and apprenticeship requirements would be treated as satisfied if a project begins construction prior to the date that is 60 days after Treasury issues guidance related to these provisions. In addition, a bonus 10% PTC is available if certain "domestic content requirements" are met or if the project is located in an "energy community" (e.g., brownfield sites). The PTC would also become available for solar projects.
While the extension of the PTC obviates the need to demonstrate beginning of construction in the near future for the purpose of qualifying for the base credit, demonstration of beginning of construction remains relevant for purposes of the deemed satisfaction of the prevailing wage and apprenticeship requirements for projects that begin construction prior to the date described above. Thus, we expect that developers will continue to safe harbor projects to avoid being subject to the prevailing wage and apprenticeship requirements. Although the existing IRS guidance with respect to beginning of construction does not contemplate demonstration of beginning of construction for this specific purpose, the guidance is broadly drafted to apply to beginning of construction generally, and we are not aware of any policy reason that a different standard should apply for purposes of the prevailing wage and apprenticeship requirements.
Accordingly, we expect that the same beginning of construction standard under current IRS guidance will apply for purposes of the prevailing wage and apprenticeship requirements. With respect to a project that has already begun construction, under existing IRS guidance, a taxpayer must make continuous progress toward completion once construction has begun. However, this continuity requirement is deemed satisfied if the project is placed in service by an outside date. For example, under current IRS guidance, a wind project that began construction in 2016 must be placed in service prior to January 1, 2023, in order to be deemed to satisfy the continuity requirement; otherwise, the project would need to demonstrate actual continuity throughout construction in order to be eligible for the 100% PTC. Under the Act, as long as the project clearly began construction prior to 2025 (e.g., it is placed in service prior to 2025), the project would be eligible for the 100% PTC even if it fails to be placed in service by January 1, 2023.
In general, the extension of the PTC would apply for projects or equipment placed in service after December 31, 2021. However, certain provisions, including the bonus for domestic content, would apply only for projects placed in service after December 31, 2022.
Extension and Modification of the ITC
The ITC would be extended to projects beginning construction before January 1, 2025.
The structure of the ITC would follow the general structure of the PTC described above, with a 6% base credit, a percentage that would be multiplied by 5 if certain prevailing wage and apprenticeship requirements are satisfied. Like the PTC, the ITC is subject to a 10% bonus credit if certain "domestic content" requirements are met or if the project is located in an "energy community." For the ITC (but not the PTC), an additional 10% bonus credit is available for projects of less than 5 megawatts (AC) located in "low-income communities" (or 20% in the case of projects that are part of a qualified low-income housing project or qualified low-income economic benefit project).
As with the PTC, despite the extension of the ITC, demonstration of beginning of construction remains relevant for purposes of the deemed satisfaction of the prevailing wage and apprenticeship requirements.
The Act also expands the scope of ITC-eligible property to include, among other things, standalone storage and certain interconnection property. However, the inclusion of interconnection property is very narrow and limited to projects that are no greater than 5 megawatts and only to the extent the interconnection property is an upgrade to an existing transmission or distribution system and is necessary to accommodate the interconnection of such system to an applicable project. To be eligible for the ITC on standalone storage, construction must begin prior to January 1, 2025.
The inclusion of standalone storage is a welcomed and much-needed development for the solar industry. Under current law, a storage system must be coupled with qualifying "energy property" (e.g., a PV system) in order to be eligible for the ITC. As a result, there is some uncertainty as to the standard for determining whether a storage system is eligible for the ITC, particularly when the storage system is installed after the corresponding PV system has already been placed in service. With the expansion of the ITC to standalone storage, a developer would be able to add a battery system to an existing project and claim the ITC on such addition.
In general, the extension of the ITC would apply for projects or equipment placed in service after December 31, 2021. However, certain provisions, including the bonus for domestic content, would apply only for projects placed in service after December 31, 2022.
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