The Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA) offer unprecedented opportunities for businesses of all shapes, sizes and sectors to execute on their sustainability goals. The IIJA, enacted in November 2021, authorized approximately $200 billion of funding, mostly in the form of competitive grants and loans through the US Department of Energy (DOE), for public and private applicants planning pilot-scale, demonstration projects across a variety of sustainability topics. The IRA, passed into law in August 2022, offers another $280 billion in tax credits to organizations engaged in decarbonizing their operational footprint or scaling up the manufacture of advanced energy technologies within the United States.

The federal government developed these various cash and tax benefits to encourage and facilitate the sustainability ambitions of both public and private enterprises. For example, these incentives support a variety of activities including the implementation of clean energy systems, the installation of energy-efficient property in commercial buildings, the transition to electric vehicles (EVs) and the infrastructure needed to charge them, the production of sustainable fuels, and the development and manufacture of new advanced energy technologies and components.

While the opportunities to enhance the economics of sustainability projects and initiatives are many, capturing these benefits is not without complexity. The IIJA federal grant application process is technical, time-sensitive, and competitive. Nearly all the IRA tax credit programs now employ a two-tiered tax credit framework involving bonus credit value if new prevailing wage and apprenticeship (PWA) requirements are met in connection with projects greater than 1MW. If certain sustainability projects are in low-income census tracts or the site of abandoned coal mine land or power plants (so-called “energy communities”), the likelihood of grant awards may increase, and the value of certain tax credits may be enhanced or unlocked altogether. An additional 10 percent tax credit adder is available to projects if the structural steel and manufactured products used on them meet certain domestic content sourcing thresholds. Finally, many of the tax credits under IRA can now be transferred to unrelated parties for cash, offering the ability for public sector and non-profit entities that are generally immune from taxation and private sector enterprises that are not in a federal taxpaying position to still participate in the incentives.

A proactive and informed approach is key to successfully navigating this complex landscape of financial opportunity.

IIJA Federal Grants and Loans
Since the passage of the IIJA in 2021, announcements of new funding opportunities have been emerging from various offices within DOE, such as the Office of Clean Energy Demonstrations (OCED) and Energy Efficiency & Renewable Energy (EERE) among others. These grant programs support a variety of climate change priorities – renewable energy, energy storage, industrial decarbonization, hydropower, grid resilience in rural communities, decarbonization of port operations, critical minerals, low- or no-emission buses, carbon capture, and many others. These programs, in many cases, are intended to offset as much as half of the cost associated with implementing innovative projects targeted to new or improved technologies not yet widely commercialized.

The grant application process requires a detailed and technical description of the proposed project. Application narratives are expected to feature with specificity the beneficial impacts of the proposed projects on their host communities, including meaningful two-way engagement with community leaders and key stakeholders, quality local employment opportunities, and environmental stewardship. If awarded, the DOE also encourages applicants to partner with other parties – “subrecipients”– in executing the projects. Application submission deadlines may only span several weeks after funding rounds open. Therefore, the short-fused nature of the call for applications requires proactive ongoing monitoring of DOE announcements and pre-identified internal process owners, partners, and 3rd party advisors to move swiftly if a well-suited opportunity surfaces.

The DOE’s Loan Program Office (LPO) also offers favorable financing for sustainability projects, such as the LPO’s Title 17 Clean Energy Financing Program. Title 17, originally authorized by the Energy Policy Act of 2005 and more recently amended by IIJA and IRA, now has an expanded scope to support investments in innovative energy technologies and legacy energy infrastructure. The program focuses on four project categories: Innovative Energy, Innovative Supply Chain, State Energy Financing Institution-Supported, and Energy Infrastructure Reinvestment. As with federal DOE grants, the Title 17 application process is a high hurdle. But the program offers attractive rates and terms compared to what may be available from commercial banks.

IRA Tax Credits – documentation intensive
Unlike the DOE’s grants and loans, most of the tax credits under the IRA are not application-based and are instead claimed directly on federal tax returns. Tax credits exist for implementing qualifying clean energy systems (Sections 48/48E, 45/45Y), producing and selling qualified clean energy products (Section 45X), purchasing clean commercial vehicles (Section 45W), installing EV chargers (Section 30C), producing and blending sustainable fuels (Sections 40A, 40B, 45Z), carbon capture and sequestration (Section 45Q), and hydrogen production (Section 45V), among others. The onus is on the tax owner of the qualifying assets to properly document, calculate, and claim these credits to enhance their value and defend them if audited by the IRS.

Proper documentation of eligible cost is important. It does not, however, begin and end with the invoice line items for purchased equipment and contracted labor in the case of an ITC; nor is it limited to production and sales volumes in the case of a PTC. For projects with system capacity of 1MW or greater, tax owners must pay the prevailing wage to all who are conducting physical labor at the site throughout the course of the construction project to claim the ‘5X multiplier’ bonus credit. The difference can be significant – using the Section 48 ITC as an example, it would equate to a 30 percent credit versus the 6 percent base credit. This prevailing wage requirement includes the wages and fringes paid to the tax owners’ employees working on the project, as well as the workers employed by contractors and subcontractors. Qualifying projects must also utilize apprentices during construction, and the number of apprentices required is determined by specific ratio-based tests that compare against the number of journey workers operating onsite. Tax owners must therefore have a recurring process to monitor and document the extent to which PWA requirements are being met and fix any issues within the timeframe defined in the IRS regulations or face penalties and perhaps even lose the bonus credit status in some circumstances.

Tax owners interested in claiming the incremental 10 percent domestic content bonus credit must also maintain documentation that demonstrates the country origin of structural steel and iron, as well as the manufactured products and component parts being installed on the project. This documentation may be difficult to obtain especially as it relates to manufactured products since the IRS guidance focuses on a US versus non-US ratio test using a vendor’s direct cost. Vendors may be hesitant to share this type of information with their ultimate customer if they regard it as sensitive or proprietary.

• Executive sponsorship – If the C-suite prioritizes the decarbonization of operations and organizational objectives are aligned to execute on this goal, internal support for needed investments in resources to monitor, identify, apply for and comply with federal sustainability incentives is more likely.
• Multi-disciplinary collaboration – Frequent interaction between sustainability, operations, tax, finance and other groups improves awareness of new sustainability initiatives and proposed projects, as well as the types of incentives which may support them. A tax executive at a Fortune 500 industrial company mentioned to me that, until recently, he had never met the VP of Sustainability in his organization despite their offices being on the same floor for multiple years. Today these two executives make a point to invite each other to their team meetings and compare notes regularly on IRA incentives. This type of cross-functional collaboration is a key success factor.
• Partnerships with 3rd parties, vendors and contractors – Many organizations planning multiple sustainability projects over the next decade are taking a long-term view. Wherever feasible, they are exploring mutually beneficial partnerships with vendors and contractors to create efficiencies and improve visibility into documentation required by IRA. They are also looking to 3rd party consultants to help build repeatable internal processes. This is particularly helpful with the monetization of tax credits through the direct pay and transferability provisions of IRA, which requires additional diligence and specialized knowledge.

A proactive approach is key to navigating financial sustainability opportunities.

• Technology-enabled processes – Reliance on search engines for DOE opportunity spotting and use of PWA surveying tools have become more prevalent in the marketplace. High performing organizations are leveraging their internal systems to ensure the data required for applications and compliance is more accessible to their teams. These technology investments help enable the entire incentives lifecycle.
• State and local incentives layering – Stacking federal, state and local incentives opportunities together helps overall project economics. Engaging with state and local officials can also help garner support for the other critical needs of a project, such as permitting and approvals.

To be sure, federal incentives under IRA and IIJA may offer a wealth of opportunities for public and private organizations looking to achieve their sustainability goals. However, organizations must be prepared to navigate the complexities of claiming and applying for these benefits and complying with programmatic requirements. By understanding, anticipating and properly executing on these incentive programs, organizations can enhance the financial feasibility of their projects and initiatives, increase investment, and contribute to a more sustainable future.

The views reflected in this article are those of the authors and do not necessarily reflect those of Ernst & Young LLP or other members of the EY organization. The information in this article is provided solely for the purpose of enhancing knowledge. It does not provide accounting, tax, or other professional advice. Copyright 2024 Ernst & Young LLP. All rights reserved.