The IRA’s New and Expanded Tax Credits for Projects to Support Clean Energy Manufacturing and Recycling
Extension of the Advanced Energy Project Credit – IRA §13501 (§48C Credit)
The §48C Credit is computed as up to 30 percent of the qualified investment in property used in a “qualifying advanced energy project” that is certified by the US Department of Energy, and that is placed in service within two years from the date of issuance of such certification. The IRA expands the definition of a “qualifying advanced energy project” in the following key ways:
- In addition to facilities that manufacture certain renewable energy components, the definition now includes facilities that also recycle qualifying property such as, for example, critical minerals, wind turbine blades, or solar panels.
- Qualifying property and components now include products designed to be used to produce energy from water, along with those under the existing definition designed to be used to produce energy from the sun, wind, geothermal deposits, and other renewable resources.
- The new list of qualifying property will include energy storage systems and components, grid modernization equipment and components, property designed to “capture, remove, use, or sequester carbon oxide emissions,” equipment designed to “refine, electrolyze, or blend any fuel, chemical, or product which is renewable or low-carbon and low emission,” products designed to produce energy conservation technologies, and technology, components, and materials for electric or fuel cell vehicles and their associated charging or refueling infrastructure, and hybrid vehicles (those with a weight rating of less than 14,000 pounds).
- The expansion of §48C broadly encompasses all other such advanced energy property designed to reduce greenhouse gas emissions as may be determined by the US Internal Revenue Service (IRS) (including any property that re-equips existing infrastructure to reduce greenhouse gas emissions by at least 20 percent). This broad language creates an opportunity for new technologies to take advantage of these credits in the future.
The tax credits start at a base rate of 6 percent and increase to 30 percent for projects meeting prevailing wage and registered apprenticeship requirements. There are certain limitations on allocations of credits, including, for example, that the §48C credit is not available for qualified investments for which credits are allowed under §48 (energy credit), §48A (qualifying advanced coal project credit), §48B (qualifying gasification project credit), §48E (clean electricity investment credit), §45Q (carbon oxide sequestration credit), or §45V (clean hydrogen production credit).
Energy Communities: $4 billion in credits is earmarked for qualifying projects located in “energy communities,” meaning communities in which, after December 31, 1999, a coal mine or a coal-fired electric generating unit has been closed.
Important Dates: Effective January 1, 2023, the Act expands §48C to provide additional allocations of $10 billion in tax credits.
How does this tax credit differ from a §45 credit? The credits are given for doing different things. The §45 credit is for producing electricity from specified renewable sources in specified types of facilities. The §48C credit is given for investing in eligible property designed to produce equipment used for producing energy from specified renewable sources or other specified purposes. For example, Taxpayer A might receive a §48C credit for investing in a new factory to manufacture wind turbine blades. Taxpayer B might qualify for a §45 credit by constructing a wind farm and producing electricity.
Advanced Manufacturing Production Credit – IRA §13502 (§45X Credit)
The IRA creates a new §45X production credit for each eligible solar and wind component that is produced domestically and sold to an unrelated party. Section 45X credits are based on the type of equipment or material manufactured, how much equipment or material is produced, and certain other criteria. The goal of §45X is to incentivize (1) building new facilities to support clean energy supply chains (2) at a globally competitive scale.
The §45X credit encourages innovation and efficiency because, for example, with respect to certain solar components, credits are tied to the productivity of a solar panel rather than its cost, encouraging companies to manufacture higher-efficiency panels rather than raise prices to increase credits.
The full tax credits are available only through the end of 2029 and drop by 25 percent per year to zero over the subsequent three years. This feature incentivizes rapid growth in manufacturing so companies may maximize the value of the credits they can receive before they drop in value.
Another provision that incentivizes companies to scale quickly is the direct payment feature. Tax credits under §45X (together with the clean hydrogen and carbon oxide sequestration credits) are available to for-profit enterprises as direct payments (i.e., refundable credits) for the first five years they are claimed so companies can receive their full value even if it exceeds the amount of federal taxes they owe. We expect that the IRS will develop additional rules for how the §45X tax credits work.
Important Dates: The credits available under §45X the credit would apply to qualifying components produced and sold after December 31, 2022, and will decrease by 25 percent per year between 2030 and 2032, until they are fully phased out with respect to components sold after December 31, 2032.
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