The IRA’s “energy security” subtitle includes provisions providing tax credits for the production and/or consumption of clean energy, carbon emissions reduction, and electric vehicle purchases as part of the effort to promote domestic energy security and manufacturing. Manufacturers could get the tax benefit related to an in-progress or planned project at an existing facility or if they produce renewable energy equipment components. Almost any entity with environmental, social, and governance (ESG) initiatives will likely benefit from use of IRA tax incentives.
The IRA provides for a direct offset to federal tax liability in the form of a tax credit. Eligible entities (including manufacturers) can use the tax credit against their own tax liability. If a company doesn’t have tax liability or taxable income, they can transfer/sell the credit to another taxpayer. Tax–exempt entities (like state and local governments, the Tennessee Valley Authority, tribal governments, and colleges and universities) can receive a direct payment from the IRS. This credit will be tied to costs related to eligible projects placed into service after December 31, 2022.
Types of Tax Credits
There are three types of tax credits that will help manufacturers and other entities decrease their capital cost for projects that promote energy conservation, whether that relates to storage of energy, a reduction of net new energy/emissions, or the creation of renewable energy at their facility: The Inflation Reduction Act of 2022 (IRA) includes over 70 separate investment, production, or excise tax credits, most of which are effective through 2032.
- The investment tax credit (ITC) is a percentage of eligible energy capital cost for new construction related to new property that captures or generates different types of renewable energy. The credit will vary in amount based on energy property type, project location, and American content. It likely will be the most accessed credit, as the credit is earned when the project is placed in service.
- The production tax credit (PTC), which can be for a variety of alternative fuels (solar, wind, biomass, geothermal, hydropower, to name some), is paid based on unit production over 10 years.
- The excise tax credit (ETC) offers benefit per gallon for any biodiesel mixture, alternative fuel, alternative fuel mixture, sustainable aviation fuel sold or used by a company.
Additional bonus credits will be given to projects locating in a named “Energy Community.” These Energy Communities are specific census tracts that are defined and targeted areas where prior economies were tied to coal, oil, and/or natural gas heavy industry sites. These targeted areas are meant to drive investment in new energy production infrastructure.
For certain wind and solar projects, an additional credit yet is additive to above credits for projects located in Environmental Justice areas.
There are three types of tax credits that will help manufacturers and other entities decrease their capital cost for projects that promote energy conservation. The significance of the legislation has been slow to resonate among the primary beneficiaries of the law, perhaps because the energy credits are a new entitlement buried as a subtitle in a much larger law. A manufacturer may be surprised to hear that a 30 percent — even now up to 50 percent — benefit of a $20 million project may be eligible for an ITC.
In addition to tax credits for energy projects, there are also more than 20 ITC and PTC tax credit types for manufacturers who invest in their U.S. facility production lines to make energy equipment (or will make certain components going into that energy equipment) that will go into energy projects.
The spirit of the IRA tax incentives is to help American companies maximize existing energy resources using a range of new, advanced, efficient technologies. The incentives encourage companies undertaking a major building project to ask, “Will it really cost any more to build a property that will be more efficient in the long-term?”
If a company is attempting to use less energy or reduce its carbon footprint, an IRA tax credit can help. A company may not even have “renewable energy projects” as a priority, but if they need to install a wastewater treatment plant, that could qualify for the credit.
The incentives encourage companies undertaking a major building project to ask, “Will it really cost any more to build a property that will be more efficient in the long-term?” The food and beverage industry, for example, may not use a lot of energy compared to others in the manufacturing sector. But food and beverage companies do create a byproduct water that needs to be treated. Because that wastewater is rich in nutrients, it can also generate energy.
That wastewater is often the biggest point of interaction with the municipality because it’s discharging to the municipality. Companies are always considering whether they pretreat wastewater or whether they discharge and let the municipality treat it. Municipalities generally charge a rate per gallon per unit of strength that is applied to that discharge. If they needed to expand their wastewater treatment facility, the cost of that expansion would generally be passed on to industry in the form of higher rates.
Because of the IRA, municipalities now have a tax incentive to expand their wastewater treatment facilities without increasing their wastewater treatment rates as much. They can use this expansion as an incentive to retain an expanding local company or to draw new industries to the area.
The IRA tax credits also may influence the site selection of non-American companies looking to re-locate to expand their market share.
The Clock Is Ticking
The most important thing for manufacturers, and other qualified entities, is taking action soon to preserve the tax credit. In order to preserve the tax credit, without needing to meet any prevailing wage and apprenticeship requirements (and as a result securing the 5X bonus criteria), a project must begin construction before 60 days after the IRS issues guidance on those requirements. That guidance has not been issued but is likely to be issued soon. Prior IRS guidance has established two ways to meet “begin construction” — physical work of a significant nature or meeting the 5 percent safe harbor provision. Either test can allow you flexibility if you are not yet permitted to get dirt moving on your site.
How Do I Take Advantage of the IRA’s New or Expanded Credits?
- Are you considering a plant expansion where you are changing the use, consumption, or storage of energy at your facility?
- Do you manufacture components qualifying as renewable or which have high domestic content?
- Does your company have an ESG strategy driving future capital investments?
- Are you planning or currently executing a project to enhance heat or carbon capture, utilize wind, solar or hydropower, or harness biogas to make heat, electricity, or a transportation fuel?
- Approximately 70 different energy property types are eligible for their own federal tax credit.
- The federal tax credits can be used by an owner of the project or be sold to another taxpayer.
- To preserve and maximize the tax credit value percentage, you can take early steps to meet safe harbor.
- Most credits are good through 2032 — the longest ever U.S. “energy policy” timeframe.
- Significant enhancements have been made to the USDA and DOE loan programs (some for direct, low-interest loan funding).
- If structured optimally and timed correctly, a credit could be worth 50+ percent of total qualifying costs.