President Biden signed into law the 2022 Inflation Reduction Act (the Act), a major tax, healthcare, and climate bill that includes numerous provisions affecting businesses. Much of the Act is paid for by a minimum tax on corporations with more than $1 billion in income, a one-percent excise tax on corporate stock buybacks, increased IRS enforcement of tax laws, and an extension on the limitation for noncorporate taxpayers of deductions of excess farm losses and excess business losses.
These new taxes help pay for an array of tax credits aimed at reducing carbon emissions and promoting energy efficiency. With respect to these incentives, the Act generally provides two different credit values: a base rate and an alternative, or bonus rate. The bonus rate equals five times the base rate and applies to projects that meet certain wage and apprenticeship requirements. A taxpayer must satisfy both requirements to receive the bonus credit rate. Otherwise, taxpayers may claim the relevant credit at the base rate.
Under the wage requirements, taxpayers must ensure that laborers and mechanics are paid prevailing wages during the construction of a qualifying project, and, in some cases, for the alteration and repair of the project for a defined period after the project is placed into service.
The Act also contains domestic content requirements which require that, with respect to the project for which a tax credit is claimed, the taxpayer must ensure that any steel, iron, or manufactured product that is part of the project at the time of completion was produced in the United States. The domestic content requirements generally apply for purposes of the production and investment tax credits.
The following is a summary of the Act’s key energy incentives for businesses.
Energy Investment Tax Credit
The Act extends the application of the energy investment tax credit (ITC), which allows taxpayers to claim a tax credit for the cost of energy property. In most cases, the provision extends the credit for property for which begins construction before January 1, 2025.
The ITC is expanded to include energy storage technology, biogas property, microgrid controllers, dynamic glass, and linear generators. These technologies are eligible for a 6 percent base credit rate or a 30 percent bonus credit rate for any property that begins construction before January 1, 2025.
Businesses may claim an increased credit with respect to energy property placed into service after December 31, 2022, if such property meets the domestic content requirements. The increase is 2 percentage points (or 10 percentage points if the taxpayer meets the prevailing wage and apprenticeship requirements). For any energy property that is placed in service within an energy community, the credit percentage is increased by 2 percentage points (or 10 percentage points if the taxpayer meets the prevailing wage and apprenticeship requirements). An energy community is defined as a brownfield site, an area with significant fossil fuel employment, or a census tract or any immediately adjacent census tract in which, after December 31, 1999, a coal mine has closed, or, after December 31, 2009, a coal-fired electric generating unit has been retired.
The amendments made by this provision generally apply to property placed in service after December 31, 2022, but only to the extent the basis of such property is attributable to the construction, reconstruction, or erection after December 31, 2022. The extension of credits and modification of credit rates (including the higher rates for projects meeting the wage and apprenticeship requirements) apply to property placed in service after December 31, 2021. The modifications to rules relating to tax-exempt bonds apply to property that begins construction after the date of enactment.
Energy Credit for Solar and Wind Facilities Placed in Service in Connection with Low-Income Communities
The Act provides for an enhanced incentive for certain solar and wind facilities. Property eligible for the credit includes energy storage technology related to such solar or wind property. The amount that may be allocated is limited to an annual capacity limitation of 1.8 gigawatts for each of calendar year 2023 and 2024 (zero for calendar years thereafter). Any unused allocations are carried over, increasing the capacity limit for the following year. This provision takes effect on January 1, 2023.
Credit for Carbon Oxide Sequestration
The Act extends the credit for carbon oxide sequestration for facilities that begin construction before the end of 2032. The provision also modifies the minimum capture requirements for qualified facilities and generally applies to facilities or equipment placed in service after December 31, 2022.
Incentives for Biodiesel, Renewable Diesel and Alternative Fuels
The Act extends the income and excise tax credits for biodiesel and biodiesel mixtures at $1.00 per gallon through December 31, 2024. The provision also extends (1) the $0.10-per-gallon small agri-biodiesel producer credit and (2) the $0.50 per gallon excise tax credits for alternative fuels and alternative fuel mixtures through December 31, 2024. This provision applies to fuels sold or used after December 31, 2021.
Second-Generation Biofuel Incentives
The Act extends the second-generation biofuel credit under Code Sec. 40(a) for fuel produced and sold before January 1, 2025, effective for fuel produced and sold after December 31, 2021.
Sustainable Aviation Fuel Credit
The Act provides a new refundable blenders tax credit for each gallon of sustainable aviation fuel sold as part of a qualified fuel mixture. To claim the credit, taxpayers must certify that such fuel reduces lifecycle greenhouse gas emissions by at least 50 percent, determined in accordance with the requirements of the most recent Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) adopted by the International Civil Aviation Organization (ICAO) with the support of the United States, or under any similar methodology which satisfies the criteria under Section 211(o)(11) of the Clean Air Act. Taxpayers must also register with the Treasury Secretary and provide third-party verification that they meet the relevant requirements of the CORSIA scheme (or other similar regime), including reporting and traceability requirements. In addition, the provision terminates the $1.00 tax credit for aviation fuel produced from biodiesel beginning after December 31, 2022. This provision applies for fuel sold or used after December 31, 2022. The credits allowed under this provision expire after December 31, 2026.
Advanced Manufacturing Production Credit
The Act provides a production credit for certain eligible components that are produced and sold. Eligible components include solar polysilicon, wafers, cells, modules, backsheets, longitudinal purlins, and structural fasteners; wind blades, nacelles, towers, and offshore foundations; inverters; battery electrode active materials, cells, and modules; and critical minerals. The credits are provided based on mass, watt-capacity, sales price, or production cost.
Clean Energy Production and Investment Credits
The Act creates an emissions-based incentive that would be neutral and flexible between clean electricity technologies. Taxpayers are able to choose between a production tax credit or an investment tax credit. Any power facility of any technology can qualify for the credits, so long as the facility’s carbon emissions are at or below zero.
Cost Recovery for Qualified Facilities, Qualified Property, and Energy Storage Technology
The Act provides that any facility described in the clean electricity production credit and any qualified property or grid improvement property described in the clean electricity investment credit will be treated as 5-year property under the general depreciation system.
Clean Fuel Production Credit
The Act creates a technology-neutral incentive for the domestic production of clean fuels. The level of the incentive depends on the lifecycle carbon emissions of a given fuel. Zero-emission fuels qualify for a base incentive of $0.20 per gallon or gallon equivalent. Sustainable aviation fuel that meets certain American Society for Testing and Materials standards and is not derived from palm oil qualifies for a base incentive of $0.35 per gallon or gallon equivalent. Qualifying production is restricted to production in the United States of fuel that is used or sold.
Increase in Research Credit Against Payroll Tax for Small Businesses
Under current law, eligible start-up businesses are allowed to elect to claim up to $250,000 of the research credit against their payroll taxes. The Act allows those businesses to claim an additional $250,000 each year against Medicare payroll taxes.
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