Revised February 20, 2023
Q&A on the Inflation Reduction Act
During our webcast on the tax provisions of the Inflation Reduction Act of 2022 (H.R. 5376) (the “IRA”), we received over 800 questions. Below we answer the ones that are of the broadest interest to the renewable energy industry.
The webcast is available here as a podcast and the introductory presentation from the webcast is available here.
The Q&A is divided into the following categories:
- Direct Pay
- ITC for Storage
- ITC Eligibility of Interconnection Costs
- Effective Dates
- Solar PTC
- Prevailing Wage and Apprenticeship Requirements
- Bonus Credits (Generally)
- Domestic Content
- Energy Communities and Low-Income Communities
- Carbon Capture Utilization and Sequestration
- Tax Credits for Manufacturers
- Three Year Carryback
- Book Minimum Tax
We want to thank Gabrielle Jacques, Ibrahim Basit, Jenna Goldman, Sol Kwon, Harriet Wessel and Viki Vozarova for their contributions in preparing this post.
Unless otherwise specified, references to “section” or “§” are to the Internal Revenue Code of 1986, as amended (the “Code”). Further, Code section references are to the Code as amended by the IRA, unless otherwise noted.
Q1: What is the effective date for transferability?
A1: Credits may be sold to unrelated parties starting in 2023.
Q2: What does it mean that credits are now “transferable?”
A2: When credits are transferable, they can be sold to a third-party purchaser. See our previous blog post for more information: https://www.projectfinance.law/tax-equity-news/transferability-ain-t-all-it-s-cracked-up-to-be
Q3: Can the credits be recaptured once sold? What happens if there is an IRS audit, and a portion of the credit is disallowed?
A3: Yes, the transferred credits are still subject to recapture under section 50(a), but it is not clear whether the transferor or transferee suffers recapture in that sense. We expect further guidance will be issued in this area. Similar to the recapture question, it is unclear whether a disallowance on audit impacts the transferor or transferee. This is another area in which we expect further guidance from the IRS.
Q4: If you sell section 48 investment tax credits, is the depreciable basis still reduced by one-half of the tax credits?
A4: Yes, the seller’s depreciable basis is still reduced by half.
Q5: Do passive loss rules apply to transferees?
A5: The answer to this question is currently being debated in the market and is an area where tax lawyers disagree. Section 6418(a) provides that the transferee will be treated as the taxpayer with respect to the credit. If the transferee is treated as the taxpayer with respect to the credit, then the passive loss rules should still apply as they would apply to transferor taxpayer if the transferor were to claim the credits. For this reason, we think the better view is that the passive loss rules still apply to the transferee. Further, conversations with Capitol Hill tax staff suggest that they were not contemplating opening the tax credit market to dentists and doctors. The argument on the other side is that section 469(g) provides that passive tax credits are released (i.e., available to offset the tax on any type of income) once the taxpayer disposes of its “entire interest in the passive activity.” The buyer of the tax credit does not own an interest in the project, so when will it have disposed of its interest in the activity? The question of the applicability of the passive activity loss rules to buyers of tax credits is not clear and merits guidance from the IRS.
Q6: Can you sell tax credits to more than one buyer?
A6: Credits can only be sold once. The transferee cannot resell the credit. However, a taxpayer can sell original credits to more than one transferee.
Q7: Who claims depreciation when credits are sold?
A7: The seller retains ownership of the asset and claims depreciation.
Q8: Will the proceeds from the sale of tax credits be subject to taxation?
A8: The proceeds from the sale of tax credits will not be subject to federal income taxation. State rules differ on taxability—although many states mirror the Code.
Q9: Which credits are transferable?
A9: Transferrable credits include the credits available under sections 30C (alternative fuel credit), 45 (production tax credit), 48C (manufacturer’s tax credit), 45Q (carbon capture and sequestration credit), 45U (zero emission nuclear), 45V (clean hydrogen), 45X (advanced manufacturing production) and 48 (investment tax credit).
Q1: What is the effective date for Direct Pay?
A1: Direct pay is available for projects that are placed into service after December 31, 2022.
Q2: Which entities are eligible for direct pay with respect to the ITC and PTC?
A2: Eligible entities include, tax-exempt entities, state or local governments, the Tennessee Valley Authority, Indian tribal governments, or an Alaska Native Corporation. The entities eligible for direct pay are not permitted to transfer (i.e., sell) tax credits. Certain credits (i.e., the section 45Q carbon capture credit, the section 45V clean hydrogen PTC, and the section 45X advanced manufacturing credit) are exempt from the tax-exempt entity requirements. Any taxpayer can elect direct pay for those credits for a five-year period.
Q1: What is the effective date for the stand-alone storage tax credit? Specifically, is the stand-alone tax credit for storage available to a project placed in service in 2022?
A1: The stand-alone storage credit is available for projects placed into service starting in 2023. It is not available for projects placed in service in 2022.
Q2: Would augmentation of batteries in the future be eligible for the ITC if the original project was placed in service prior to 2023?
A2: Yes, starting in 2023, modifications to existing batteries should qualify for the stand-alone storage credit as long as the modification increases the capacity of the battery from less than 5 kilowatt hours to more than 5 kilowatt hours or increases the capacity by at least 5 kilowatt hours.
Q3: If an ITC was claimed on a co-located storage facility prior to the enactment of the IRA must it still be charged by green power at least 75 percent of the time?
A3: Yes. Prior to the enactment of the IRA, the ITC could only be claimed on “solar property,” and not on storage on a stand-alone basis. For a battery to be considered part of the solar property, it had to be charged by the solar array no less than 75 percent of the time. That rule still applies to projects placed in service prior to the enactment of the stand-alone storage ITC.
Q4: Can a project claim the ITC on the battery and a PTC for the power produced by the rest of the facility?
A4: While the IRA is not clear on its face on this point, it appears that it was the intention of Congress to allow both an ITC on a battery and a PTC on a solar facility when co-located. House Ways and Means Committee Chairman Neal clarified in a floor statement that “the Committee intends that a credit is allowed for energy storage technology under section 48 regardless of whether it is part of a facility for which a credit under section 45 is or has been allowed.”
Q5: Do the prevailing wage and apprenticeship requirements apply to the stand-alone storage ITC?
A5: Yes. To qualify for a 30 percent ITC, a stand-alone storage project must either satisfy the prevailing wage and apprenticeship requirements or be exempt from such requirements by starting construction no more than 60 days after guidance is issued.
ITC Eligibility of Interconnection Costs
Background: The interconnection costs of projects with a capacity of up to five megawatts (a/c) qualify for the ITC, so long as the project itself qualifies for the ITC. The interconnection costs qualify for the ITC even if the project owner pays for the interconnection improvements, but the interconnection improvements are owned by the utility.
Q1: If a project is placed in service in 2022, are its interconnection costs ITC eligible?
A1: They are not.
Q2: If the power generation project associated with the interconnection costs opts for the PTC over the ITC, are the interconnection costs still ITC eligible?
A2: They are not. Interconnection costs are only eligible if they are associated with “energy property.” If the election is made by an owner of a solar project to claim the PTC, the project ceases to “energy property” and becomes a “qualified facility.”
Q3: If a project has a capacity in excess of five megawatts (a/c), is the ITC for the interconnection costs reduced proportionally?
A3: It does not.
Q4: If the a project qualifies for one of the ITC adders (e.g., an additional ten percentage points for meeting the domestic content incentive requirement), does the adder apply to the interconnection costs too?
A4: It does. The domestic content added applies to the “energy project”. The “energy project” is “a project consisting of one or more energy properties that are part of a single project.” Energy property includes “amounts paid or incurred by the taxpayer for qualified interconnection property in connection with the installation of energy property.”
Q5: How are co-located projects treated for purposes of the five megawatt (a/c) ceiling? (For instance, two five megawatt (a/c) projects installed on the same university campus.)
A5: The standard is the “energy property” has to be five megawatts or less. There is not statutory language that addresses when two related plants would constitute a single item of “energy property.” This appears to be an issue that will need to be addressed by the IRS in guidance.
Q1: Can you clarify which tax benefits are not available for projects placed in service in 2022?
A1: The domestic content bonus and the energy community bonus are not available for projects placed in service before January 1, 2023. An incentive, however, of placing a project in service in 2022 is the potential to be deemed to satisfy the wage and apprenticeship requirements through the “grandfather” provision of the IRA (i.e., assuming guidance is issued after November 2, 2022, construction of a facility placed in service in 2022 necessarily began prior to the date that is 60 days after the Secretary published guidance with respect to the wage and apprenticeship requirements). Such project, therefore, will be deemed to satisfy such requirements and eligible for the 5x multiplier for the base production tax credit (the “PTC”) or base ITC (the “ITC”) rate, as applicable.
Q2: For projects with start of construction date before 2022, is there any deadline or continuity requirement? For example, can a 2019 project be placed in service in 2030?
A2: The continuity prong set forth in relevant IRS Notices will continue to apply to certain projects which are subject to begun construction restrictions unless the IRS issues guidance to the contrary. The continuity requirement may be satisfied through relevant facts and circumstances or by meeting the applicable safe harbor placed-in-service deadline, known as the continuity safe harbor. Under IRA-amended sections 45 and 48, a qualified project which is placed in service after December 31, 2022, must satisfy the beginning of construction requirements (including continuity) on or prior to December 31, 2024. A project which begins construction after December 31, 2024 will fall under the purview of the technology neutral tax credit sections 45Y and 48E, as applicable. The continuity requirement becomes obsolete under the new technology-neutral credit provisions of section 45Y and 48E if construction of the facility begins after 2024, and the facility is placed in service prior to the applicable phase out provisions start to apply.
Q3: Are 2022 projects eligible for direct pay and/or transferability?
A3: The direct pay and transferability elections may be made by the respectively applicable entities beginning in tax years commencing after December 31, 2022. “Eligible credits” are defined differently by each of the direct pay and transferability provisions.
Direct Pay “eligible credits” include:
- So much of the credit for alternative fuel vehicle refueling property allowed under section 30(C), which pursuant to subsection (d)(1) of such section is treated as a credit listed in section 38(b)
- Section 45(a) PTCs attributable to qualified facilities placed in service after December 31, 2022.
- Section 45Q(a) carbon oxide sequestration credits attributable to carbon capture equipment placed in service after December 31, 2022.
- Section 45U(a) zero-emission nuclear power production credits
- Section 45V(a) clean hydrogen production credits for qualified facilities placed in service after December 31, 2012
- Section 45W credit for commercial vehicles (only available for tax-exempt entities described in clause (i), (ii), or (iv) of section 168(h)(2)(A)
- Section 45X(a) advanced manufacturing production credits
- Section 45Y(a) clean energy production credits
- Section 45Z(a) clean fuel production credits
- Section 48 ITCs
- Section 48C advanced energy project credits
- Section 48E clean energy investment credits
Transferability “eligible credits” are not similarly restrictive regarding the placed in service date for section 45(a) PTC-generating facilities or section 45Q(a) carbon capture facilities . Therefore, beginning in 2023, certain taxpayers for which the direct pay option is not available, may make an annual election to transfer credits generated during such election year by certain qualified facilities previously placed in service. See the “Transferability” and “Direct Pay” sections above for more details surrounding eligibility.
Q4: Will biogas projects placed in service in 2022 qualify for the ITC?
A4: No, the IRA amendment to section 48(a)(3)(A) adding biogas property to list of eligible types of energy property applies to property placed in service after December 31, 2022.
Background: Solar projects placed in service in 2022 or later may opt for a PTC for the project’s first ten year of operations in lieu of the 30 percent ITC. When the IRS last calculated the PTC with the inflation adjustment, it determined it to be $26.
Q1: Why will many solar projects owners will find the PTC to be more lucrative than the ITC?
A1: The questions of the PTC versus the ITC for solar does not have a one size fits all answer. Project owners will want to undertake a nuanced calculation to evaluate the PTC versus the ITC. Here are the factors that go into the calculation: (i) the cost of the project, (ii) the project’s capacity factor, (iii) the discount rate applied by the project owner to present value the ten year PTC stream, (iv) the assumed PTC inflation rate and (v) whether the project is five megawatts (a/c) or less such that its interconnection costs would be ITC eligible. Each of these factors is discussed below.
The higher the relative expense of the project the more benefit the 30 percent ITC has relative to the PTC. This is why offshore wind projects, which are quite expensive due to the challenges of building a wind farm in the ocean, typically favor the ITC over the PTC.
The higher capacity factor of the project the more megawatt hours it will produce and the more lucrative the PTC will be relative to the ITC. For instance, anecdotal evidence suggests that the PTC is a relatively clear favorite for utility scale projects in the Southwest, while the ITC is likely more favorable for projects in the Northeast.
The PTC is a ten year stream of tax credits, so to compare it to the ITC that stream needs to be present valued back to project’s placed in service date. The discount rate should reflect (i) the time value cost of receiving the PTCs over ten years, instead of the ITC the first year and (ii) the risk that the project produces less than expected over that ten year period. In solar appraisals, appraisers typically use an after-tax discount rate of between five and seven percent in applying the discounted cash flow method to value solar projects. That may be a useful analogy for this calculation; however, it is ultimately a subjective decision for the project owner to make.
The PTC has an annual inflation adjustment. When the PTC was enacted in 1992, it was $15 a megawatt hour and thirty years later when the IRS last calculated it was $26 a megawatt hour due to inflation adjustments. The IRS publishes the adjustment annually. One’s prediction for inflation over the next decade will impact the value of the PTCs a project can generate.
Finally, if the project has a capacity of five megawatts (a/c) or less, then its interconnection costs are ITC eligible. However, as discussed in Q&A #2 under Interconnection Cost ITC Eligibility, that benefit is forgone if the project owner opts for the PTC. For projects that are five megawatts or less, this factor weighs in favor of the ITC.
Q2: If the owner of a solar project elects the PTC, will the owner avoid the 50 percent basis reduction required by the ITC rules?
A2: Yes. There is no basis adjustment with respect to the PTC. Further, the PTC does not have “recapture” rules for transfers or removing the project from service.
Q3: How likely is it that an executed solar tax equity deal for a project placed in service in 2022 would be restructured to use the PTC, rather than the ITC?
A3: It is fairly unlikely. The parties would need to determine the level of PTCs each believes will be generated over the first ten years of operations. The tax equity investor will likely want to take a much closer look at transmission congestion and other issues that could prevent the project from selling electrons to generate PTCs. The model would need to be redone to reflect PTCs, rather than the ITC. The tax representations the sponsor makes to the tax equity investor would need to be renegotiated. The tax equity investor would likely require a tax opinion from its counsel addressing the PTC. In other words, it is almost like a new deal.
Given how leanly staffed tax equity investors and their advisors are, it is unlikely the tax equity investor would want to take the time to go through that multi-step process. This reluctance primarily stems from the fact that the tax equity investor could be spending the time on originating and closing new deals. Therefore, a sponsor would need to provide the tax equity investor with an compelling reason to restructure the deal.
Q4: How are megawatts hours measured for determining the amount of the PTC?
A4: It is the amount “sold by the taxpayer to an unrelated person.” If the taxpayer is a utility or related to a utility, the “unrelated person” is deemed to be the consumer. The PTC is based on the MWh sold, and not the amount generated if there are losses prior to the point of sale.
Prevailing Wage and Apprenticeship Requirements
Q1: When does a project need to begin construction to qualify for a 30 percent investment tax credit without needing to meet the prevailing wage and apprenticeship requirements?
A1: A project must begin construction before 60 days after the IRS issues guidance on the prevailing wage and apprenticeship requirements to avoid having to meet the wage and apprenticeship requirements to qualify for a 30 percent investment tax credit.
Q2: The prevailing wage and apprenticeship requirements do not apply to a project construction of which begins before 60 days after the IRS issues guidance on the prevailing wage and apprenticeship requirements. How is a project considered to have begun construction for this purpose?
A2: The IRA leaves it to the IRS to define "begun construction." It would be very surprising if the IRS does not use the same concepts as it has in the prior Notices issued in respect of the previous beginning of construction requirement.
Q3: What is the anticipated timeline for the Treasury to issue guidance on the prevailing wage and apprenticeship requirements?
A3: Conventional wisdom is four to six months, but the Treasury could have political motivations to expedite that guidance.
Q4: Are the prevailing wage requirements limited to construction phase? Do they apply to routine O&M work?
A4: Prevailing wages must be paid not only during construction, but also on any alteration or repair of the project that occurs during the first five years (in the case of an investment tax credit) or 10 years (in the case of production tax credits) of operation. The prevailing wage requirements do not apply to routine O&M work.
Q5: Do projects under one megawatt (a/c) in size need to meet the prevailing wage and apprenticeship requirements to get the full credit?
A5: Projects with a maximum net output of less than one megawatt do not have to meet the prevailing wage and apprenticeship requirements to qualify for a 30 percent investment tax credit.
Q1: Is the bonus credit for project in low income area available for projects with a maximum net output of up to five megawatt (a/c) or up to 4.99 megawatt (a/c)?
A1: Effective January 1, 2023, qualified solar and wind facilities with a maximum net output of less than five megawatt (a/c) may be eligible for a ten percent bonus on the otherwise determined ITC rate if located in a low-income community or on Indian land. There is a 20 percent bonus on the otherwise determined ITC rate if the project is part of a “qualified low-income residential building project” or a “qualified low-income economic benefit project” (each as defined within section 48(e)).
However, this bonus credit for projects in low income areas must be allocated to the taxpayer by the IRS. That is without an allocation a taxpayer may not claim the bonus credit, even if the project otherwise qualifies.
Q2: How do you calculate the basis for depreciation with a 50 percent ITC?
A2: When the ITC is claimed, the depreciable basis equals the full tax basis less 50 percent of the ITC. An example for illustrative purposes:
- Type 1 solar project with a maximum net output of 0.9 MWAC which began construction in 2023
- Placed in service in 2024
- 100 percent domestic iron/steel; 45% total costs of manufactured products attributable to manufactured products produced in the United States
- Project is located in a brownfield site (as defined in subparagraphs (A), (B), and (D)(ii)(III) of section 101(39) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980))
- Project Tax Basis = $1,000,000
Base Energy Percentage
Labor Requirement Multiplier
Energy Percentage before Adders
Domestic Content Bonus
Energy Community Bonus
Project Tax Basis
Section 50(c) Depreciable Basis Reduction Calculation
Project Tax Basis
LESS: 50% of ITC
Depreciable Basis after applying ITC
Q3: Can you qualify for the bonus credits without qualifying for prevailing wages?
A3: The IRA amends each of the ITC and the PTC to provide two credit values – a “base rate” (equal to one fifth of the pre-IRA value) and a “bonus rate” (equal to the full pre-IRA value). In order to earn the bonus rate with regards to a project one megawatt (a/c) or larger, the taxpayer must satisfy BOTH the wage requirement (during construction and during repair or alteration) and the apprenticeship requirement. There are, however, various “adders” available for projects placed in service after December 31, 2022 if certain criteria are met which can increase either the base rate or bonus rate, as applicable. The “adders” are stackable, allowing for a maximum ITC rate of 70 percent for certain qualifying small solar and wind facilities; however, the final 20 percent is subject to receiving an allocation of the low income bonus credit from the IRS, and the IRS may be disinclined to allocate credits to projects that have already qualified for adders. The table below depicts the effect of these “adders” on each of the base and bonus rate eligibility tiers.
Domestic Content “Adder”
Energy Community “Adder”
Low-Income “Adder” which requires an allocation from the IRS
Q1: Can you elaborate on the domestic content requirement? What must be produced in the United States
A1: The domestic content requirements 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.
For purposes of these requirements, steel and iron must be 100 percent produced in the United States.
Manufactured products are deemed to have been manufactured in the United States if the adjusted percentage of the total cost of the components and subcomponents of the project is attributable to components that are mined, produced, or manufactured in the United States. The adjusted percentage is 40 percent. For offshore wind facilities, the adjusted percentage is 20 percent.
The ten percent domestic content adder is available for purposes of the ITC and the PTC.
Q2: Can you clarify the meaning of the requirement that steel and iron must be 100 percent produced in the United States?
A2: The IRA provides that the requirement that steel and iron should be produced in the United States shall be applied in a manner consistent with the regulations under the “Buy America Act.” The relevant regulations under the Buy America Act provide that all steel and iron manufacturing processes must take place in the United States, except metallurgical processes involving refinement of steel additives. The regulations further provide that steel and iron requirements apply to all construction materials made primarily of steel or iron, but do not apply to steel or iron used as components or sub components of other manufactured products.
Q3: With respect to the manufactured products, what is the adjusted percentage needed per project?
A3: Except for offshore wind, the adjusted percentage is:
- 40 percent for projects that begin construction before 2025,
- 45 percent for projects that begin construction in 2025,
- 50 percent for projects that begin construction in 2026, and
- 55 percent for projects that begin construction thereafter.
For offshore wind facilities, the adjusted percentage is:
- 20 percent for projects that begin construction before 2025,
- 27.5 percent for projects that begin construction in 2025,
- 35 percent for projects that begin construction in 2026,
- 45 percent for projects that begin construction in 2027, and
- 55 percent for projects that begin construction thereafter.
Q4: How are products that are manufactured in the United States with components that are made in a foreign country treated?
A4: The IRA does not provide explicit guidance with respect to manufactured products that are manufactured in the United States but comprise components that are manufactured in a foreign country. Given that IRA references the regulations under the Buy America Act with respect to the steel and iron requirement, one could potentially draw analogies from those regulations to ascertain when such a manufactured product will be treated as produced in the United States. Under those regulations, for a manufactured product to be considered produced in the United States: (i) all of the manufacturing processes for the product must take place in the United States; and (ii) all of the components of the product must be of U.S. origin. A component is considered of U.S. origin if it is manufactured in the United States, regardless of the origin of its subcomponents. However, additional guidance from the IRS is needed on this point.
Energy Communities and Low-Income Communities
Q1: What is considered an “energy community” for purposes of the 10 percent bonus credit under the IRA?
A1: The purpose of incentivizing the development of factories and projects in areas where job loss will be most felt by the transition away from traditional energy generation sources is clear. Until the IRS publishes guidance, the definition of such “energy communities” is rather opaque.
The placing of qualified facilities in “energy communities” increases the tax credit amount awarded by 10 percent if located on any of the following: (i) a “brownfield site”, (ii) an area which has (or at any time after December 31, 2009, had) significant employment related to the extraction, processing, transport, or storage of coal, oil, or natural gas (as determined by the Secretary), or (iii) a census tract in which (I) after December 31, 1999, a coal mine has closed, or after December 31, 2009, a coal-fired electric generating unit has been retired, or (II) which is directly adjoining to any census tract described in subclause (I).
As sweeping as the definition may seem, there are several caveats that sponsors and manufacturers should keep in mind. First, for purposes of section 48C (manufacturers’ tax credit), only facilities located directly on or adjoining a census tract in which a coal mine or coal-fired electric generating unit has been retired (after December 31, 1999 and December 31, 2009, respectively, as specifically described in subsection (iii) of the energy communities definition above) shall be considered for the additional 10 percent credit. Second, clause (ii) of the “energy communities” definition (areas where significant employment related to coal, oil, or natural gas were once located) specifically states that that the determination of such areas shall be made by the IRS. Unfortunately, no further metrics have been provided to guide taxpayers. Finally, there is no mention of a database or map of qualifying census tracts at this time for taxpayers to search for land that would qualify as “energy communities” under the definition.
Within 180 days from the date of enactment of the IRA, the IRS must establish a formal program to consider and award certifications for qualified investments. We expect further guidance will be provided by the IRS on the interpretation of the definition of “energy communities” at that time.
Q2: Do low-income areas qualify as “energy communities”?
A2: No, low-income areas are not part of the definition of “energy communities” under the IRA. However, pursuant to specific qualifications, wind and solar electric generation projects with a capacity of less than five megawatts (a/c) that located in low-income areas may be eligible for as much as an additional 20 percent in tax credits if they are allocated the corresponding bonus credit by the IRS.
A facility will be deemed a qualified electric generation facility for purposes of the additional tax credits if such facility (i) does not produce electricity through combustion or gasification pursuant to section 45Y(b)(2)(B), (ii) has a maximum net output of less than five megawatts (a/c), and (iii) it is located in a low-income community, on Indian land, or is part of a qualified low-income residential building project or part of a qualified low-income economic benefit project. If the project is located in a low-income community or on Indian land but is not part of a qualified low-income residential building project or economic benefit project, the additional tax credits shall be increased by 10 percent. If the project is located in a low-income community or on Indian land and is part of a qualified low-income residential building project or economic benefit project, the additional tax credits shall be increased by 20 percent.
No later than January 1, 2025, the IRS will establish a program to allocate amounts of environmental justice capacity limitation and shall issue specific guidance regarding the implementation of the program. The taxpayer will have 4 years from the date of allocation, as awarded under the yet-to-be established IRS program, to place the qualifying facility in service.
As with the definition of “energy communities,” we anticipate further guidance from the IRS to fill in the detail of this program.
Q3: With regards to the increase in energy credit for solar and wind facilities placed in service in connection with low-income communities, does qualification for the bonus credit depend on the physical location of the solar project or the classification of the customer that the energy is being sold to?
A3: Section 48(e) provides an incentive for certain solar and wind facilities with a capacity of less than five megawatts (a/c) for which the IRS makes an allocation of “environmental justice solar and wind capacity”. This incentive establishes an annual capacity limitation of 1.8 gigawatts (d/c). To qualify for application of such an allocation, the facility must be either (i) located in a low-income community (as defined in section 45D(e)), or on Indian land (as defined in section 2601(2) of the Energy Policy Act of 1992) or (ii) part of a “qualified low-income residential building project” or a “qualified low-income economic benefit project.” A facility satisfying the immediately preceding clause (i), based solely on its physical location, may, if awarded allocation, earn a ten percentage point adder to its ITC rate. Alternatively, a facility satisfying either prong of clause (ii), taking into consideration the location AND characterization of the recipients of the financial benefits of electricity produced by such facility, may, if awarded allocation, earn a 20 percentage point adder to its ITC rate.
Allocations made by the Secretary pursuant to this new environmental justice incentive program are limited to 1.8 gigawatts (d/c) in each of calendar year 2023 and 2024, with the allowance for any unallocated capacity in 2023 to be carried-over into 2024. No allocations will be made thereafter under the current law.
Q5: Is a facility eligible for a ten percent credit increase for projects located in low-income communities under PTC as it is under ITC?
A5: No, the ten percent credit increase for facilities place in low-income communities, is available only under the ITC. Under section 45, the PTC is eligible for ten percent increase only under domestic content or energy community bonuses.
Q6: Would the energy community requirement have to be combined with the low-income communities bonus in order to qualify for the 60 percent tax credit?
A6: Yes, the computation of 60 percent includes bonuses from qualifying under both energy communities and low-income communities. Sixty percent could also be achieved by qualifying for the domestic content ten percent bonus and qualifying for the 20 percent bonus for certain projects in low income areas. Note, the low-income bonus has to be allocated to the project owner by the IRS.
Q1: Does clean hydrogen qualify for only a PTC (and not the ITC)?
A1: No. A taxpayer may elect to claim an ITC rather than a PTC for clean hydrogen. For the ITC election to be available, the hydrogen facility must be originally placed in service after December 31, 2022. While for the PTC, the PTC is available for the first ten years from when the facility was first placed in service by any party.
Q2: How do the “domestic content” bonus rules apply to clean hydrogen production?
A2: The “domestic content” ten percent bonus is not available for hydrogen, regardless of whether the PTC or the ITC is opted for.
Q4: How do the direct pay rules apply to the hydrogen industry?
A4: The hydrogen PTC qualifies for direct pay. Unlike most energy credits, this is the case even if the owner of the hydrogen facility is not tax-exempt. However, if a taxpayer elects the ITC for its hydrogen facility, direct pay is not available. This is because an ITC for hydrogen is governed by section 48, and section 48 energy property only qualifies for direct pay if it is owned by a tax-exempt entity.
Q5: Can a hydrogen production plant qualify for the advanced project credit in section 48C, be powered by a solar or wind project that qualifies for the ITC or the PTC and the hydrogen produced qualify for a PTC of $3 per kilogram (i.e., can all three credits be “stacked”)?
A5: A hydrogen production plant would qualify for section 45V PTC with respect to the qualified clean hydrogen it produces and sells or an ITC on the hydrogen project (by making the election provided for in section 48(a)(15)). However, neither of those credits can be combined with the section 48C credit. Further, to claim the section 48C credit, for an advanced project, requires an application that is awarded an allocation by the IRS. If the hydrogen project is powered by a solar or wind, the wind or solar project or generation can qualify for the ITC or the PTC without jeopardizing the section 45V PTC on hydrogen produced and sold or, alternatively, the ITC on the hydrogen project.”
Q6: Is there a periodic inflation adjustment for the hydrogen PTC?
A6: Yes, there is.
Carbon Capture Utilization and Sequestration
Background: The IRA provided a much needed boost to the carbon capture utilization and sequestration (“CCUS”) industry. Notably, the IRA significantly increases the credit rates and makes it easier for projects to qualify for the credit. The IRA also provides for direct pay, which will expand the ability to finance CCUS projects.
Q1: When do the new rules related to section 45Q take effect?
A1: Other than certain exceptions beyond the scope of this answer, the new rules apply to projects placed in service after December 31, 2022.
Q2: If a CCS project elects the direct pay option for 5 years, for years 6-12 would it then be eligible for the tax credit?
A2: Yes, the direct pay option is only available for the first 5 years. The remaining 7 years of the credit are eligible for the tax credit.
Q3: Can a project that claims tax credits under section 45Q also claim the bonus credits for domestic content, energy communities, etc.?
Q4: Do the wage and apprentice requirements apply to section 45Q tax credits?
A4: Yes, the same wage and apprentice rules that apply to the section 45 production tax credit and section 48 investment tax credit apply to section 45Q tax credits. The section 45Q tax credit will be reduced to 20 percent of the full credit amount if project does not begin construction no more than 60 days after the wage and apprentice guidance is issued.
Background: The IRA provides a 30 percent investment tax credit for the cost of factories to manufacture components for renewable energy projects, which is codified in section 48C. The IRA also provides a tax credit for each component manufactured, which varies by component type and is codified in section 45X. The section 48C tax credit has to be allocated by the IRS to the taxpayer, while the section 45X credit does not require an allocation. See our previous blog post for more information: https://www.projectfinance.law/tax-equity-news/inflation-reduction-act-of-2022-new-tax-credits-for-manufacturers-of-clean-energy-equipment
Q1: Can the section 48C and the section 45X tax credits be “stacked”?
A1: No. The section 45X credit is not available for components made at a factory that benefited from the section 48C credit.
Q2: Are the section 48C and the section 45X tax credits eligible for transferability and direct pay?
A2: The section 45X credit is eligible for direct pay, even if owned by a taxable entity, and transferability. The section 48C credit is only eligible for transferability.
Three Year Carryback of Tax Credits
Background: The IRA extends the carryback for tax credits from one year to three years.
Q1: Are tax credits acquired by a “buyer” under the transferability rules able to be carried back?
A1: They are. A tax credit seller may not sell tax credits that it has carried back or carried forward; however, there is no prohibition on a buyer of a tax credit carrying it back.
Q2: Are tax credits able to be carried back three years (as opposed to one year) regardless of their vintage (i.e., the year they were first reported on a tax return)?
A2: It appears that tax credits are only eligible for the three year carryback, if the credit originally arose in a tax year that starts after December 31, 2022.
Q3: Will the three-year carryback likely make tax equity investors in ITC deals more flexible about whether the placed in service date for a project slips to a later year?
A3: It seems unlikely the three year carryback will make tax equity investors more flexible about the placed in service date of ITC projects slipping a year. This is because prior to the IRA there was a one-year carryback. Therefore even before the IRA, if an ITC project’s placed in service date was delayed a year, the tax equity investor could carry the ITC back to the originally intended year for which it presumably believed itself to have tax appetite.
Many financial institutions allocate tax appetite “budgets” to their various deal teams that need tax appetite to transact (e.g., renewables, equipment leasing, low income housing tax credit investments). If the placed in service date slips, it may mean that the deal team did not use all of its “budget” for the original year and has to allocate budget from the subsequent year to the project that slipped, rather than using the subsequent year’s budget for incremental deal volume. The solution to that problem is carrying back the ITC from the subsequent year (e.g., 2024) to the originally planned placed in service year (e.g., 2023); however, section 39 requires the ITC to be carried back to the earliest available year of the three-year carryback, so that would mean carrying back three years (e.g., 2021), and the ITC is not fully used in that year then carrying back two years (e.g., 2022), and then if not fully used in that year carrying it back to the originally planned placed in service year (e.g., 2023).
However, a tax credit that is carried back is less attractive than a tax credit that is not carried back. First, to carryback a tax credit means filing an amended return that is subject to a special review process by the IRS before the IRS will pay the refund. Second, the tax equity investor does not get an economic benefit from that refund until the IRS pays it, while if the project is placed in service in the originally planned year the tax equity investor is able to apply the ITC against its quarterly estimated taxes. However, so long as no additional tax is due, which would be the case if the only event triggering the amended tax return is a tax credit carryback, the statute of limitations is not re-restarted (i.e., the IRS only has until the third anniversary of the filing date of the original return to audit that return).
Q1: Does accelerated tax depreciation cause an increase in a corporation’s potential book minimum tax liability?
A1: Eliminating the adverse treatment of accelerated tax deprecation under the book minimum tax regime was one of the issues that Senator Sinema (D-AZ) conditioned her vote for the IRA on.
On a high level, the book minimum tax is triggered if a corporate group’s deemed federal tax liability is less than 15 percent of its financial statement income. However, for determining the book minimum tax both financial statement income and the deemed federal tax liability are calculated without taking into account depreciation. Accordingly, accelerated tax depreciation does not contribute to a corporation’s book minimum tax liability.
Q2: To what extent can a corporation use tax credits to reduce its book minimum tax liability?
A2: General business credits, such as the ITC and the PTC, can be used to satisfy 75 percent of the sum of a corporation’s (i) regular tax liability and (ii) book minimum tax liability as such sum exceeds $25,000. Unused credits can be carried back three years and forward 22 years.
Q3: What are some of the ramifications of the book minimum tax on the tax equity market?
A3: Given the favorable treatment of general business credits and accelerated depreciation under the book minimum tax rules, it is difficult to envision how the book minimum tax would cause a tax equity investor to exit the market.
 See, e.g., P.L.R. 201308005 (Feb. 22, 2013).
 Cong. Rec., Vol. 168, No. 135, page 106.
 IRA § 13102(q)(2) (referencing subsection (j)).
 I.R.C. § 48(a)(8)(A) (“energy property shall include amounts paid or incurred by the taxpayer for qualified interconnection property in connection with the installation of energy property”).
 See I.R.C. § 45(d)(4).
 I.R.C. § 48(a)(8)(A) (“which has a maximum net out of not greater than five megawatts (a measured in the alternating current)”).
 I.R.C. § 48(a)(12)(A).
 I.R.C. § 48(a)(9)(A)(ii).
 I.R.C. § 48(a)(8)(A).
 See I.R.C. §§ 45(b)(6)(B)(ii), 48(a)(9)(B)(ii).
 Notice 2013-29, 2013-20 I.R.B. 1085; Notice 2013-60, 2013-44 I.R.B. 431; Notice 2014-46, 2014-26 I.R.B. 520; Notice 2015-25, 2015-13 I.R.B. 814; Notice 2016-31, 2016-23 I.R.B. 1025; Notice 2017-04, 2017-4 I.R.B. 541; Notice 2018-59, 2018-28 I.R.B. 196; Notice 2020-41, 2020-25 I.R.B. 954; and Notice 2021-41, 2021-29 I.R.B. 17.
 See I.R.C. §§45Y(d); 48E(e).
 I.R.C. § 6417(b).
 I.R.C. § 6418(f)(1)(A)(ii).
 See IRA § 13102(q)(2).
 See 87 F.R. 27204 (May 6, 2022). Since the pre-inflation adjusted PTC is now $3/MWh (as opposed to the prior $15/MWh), which is multiplied by five if the project satisfies (or is deemed to satisfy) the wage and apprentice requirements, it is not clear in what order (i) the inflation adjustment, (ii) the 5x multiplier and (iii) the rounding adjustment are applied. One reasonable reading results in a PTC for 2022 of $27.50; however, the Senate Finance Committee staff apparently has a reading that results in a PTC of $25 (i.e., even less than the $26 from the IRS’s inflation adjustment announced in May). See Senate Finance Committee published a report (“2.5 cents/kilowatt hour (inflation adjusted values)”). Either the staff of Joint Committee on Taxation or the IRS needs to promptly resolve this issue as for some projects the difference between $25 and $27.50 can mean the project is built or not.
 I.R.C. § 45(a)(2)(B).
 See Notice 2008-60.
 I.R.C. § 48(a)(9)(B)(ii).
 I.R.C. § 48(a)(10)(A); § 45(b)(7)(A).
 I.R.C. § 48(a)(9)(B)(i).
 “Low-income community” as defined in I.R.C. § 45D(e).
 “Indian land” as defined in 25 U.S.C. § 3501(2).
 I.R.C. § 50(c)(3).
 I.R.C. § 48(a)(2)(A)(i).
 I.R.C. § 48(a)(9)(B)(i).
 I.R.C. § 48(a)(12)(C)(ii).
 I.R.C. § 48(a)(14)(B)(ii).
 See I.R.C. §§ 45(a)(1); (b)(2); § 48(a).
 See I.R.C. §§ 45(b)(6); 48(a)(9); but see I.R.C. §§ 45(6)(B)(ii); 48(a)(10)(C) (providing that a facility which begins construction prior to the date that is 60 days after guidance is published will need to satisfy the prevailing wage and labor requirements during alteration or repair phases throughout the applicable recapture period).
 The base PTC credit of 0.3 cents is subject to an inflation adjustment pursuant to I.R.C. §45(c)(1).
 I.R.C. § 45(b)(9)(B)(i).
I.R.C. § 45(b)(9)(B)(iii).
 I.R.C. § 45(b)(9)(C)(i).
 I.R.C. § 45(b)(9)(C)(ii).
 I.R.C. §§ 45(b)(9)(A), 48(a)(12).
 I.R.C. § 45(b)(9)(B)(ii).
 49 CFR § 661.5(b).
 49 CFR § 661.5(c).
 49 CFR § 661.5(d).
 A brownfield is “real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant,” more specifically defined in 42 U.S.C. § 9601(39) (A), (B) and (D)(ii)(III).
 I.R.C. § 45(b)(11)(B).
 I.R.C. § 45(b)(11)(B)(iii).
 I.R.C. § 45(b)(11)(B)(ii).
 Subject to certain specifications listed in I.R.C. § 45D(e), a low-income community is generally defined as any population census tract if the poverty rate for such tract is at least 20 percent or if the median family income for such tract does not exceed 80 percent of statewide median family income.
 Indian land includes “Indian reservations, public domain Indian allotments, former Indian reservations in Oklahoma, land held by incorporated Native groups, regional corporations, and village corporations under the provisions of the Alaska Native Claims Settlement Act, and dependent Indian communities within the borders of the United States whether within the original or subsequently acquired territorial thereof, and whether within or without the limits of a State.” 25 U.S.C. § 3501(2)).
 A facility installed on a residential rental building which participates in a covered housing program (as further described in section of 34 U.S.C. § 12491(a)(3)), a housing assistance program administered by the Department of Agriculture under title V of the Housing Act of 1949, a housing program administered by a tribally designated housing entity (25 U.S.C. § 4103(22)), or such other affordable housing programs as the IRS may provide, and the financial benefits of the electricity produced by such facility are allocated equitably among the occupants of the dwelling units of such building. I.R.C. § 45(e)(2)(B).
 A facility that generates electricity and at least 50 percent of the financial benefits of the electricity are provided to households with income of less than 200 percent of the poverty line (as determined under I.R.C. § 142(d)(2)(B)) or less than 80 percent of area median gross income (as determined by I.R.C. § 142(d)(2)(B)). I.R.C. § 45(e)(2)(C).
 I.R.C. § 45(e)(1)(A)(i).
 I.R.C. § 45(e)(1)(A)(ii).
 I.R.C. § 45(e)(4)(A).
 I.R.C. § 45(e)(4)(E).
 A facility is part of a “qualified low-income residential building project” if such facility is (1) installed on a residential rental building which participates in a covered housing program (as defined in section 41411(a) of the Violence Against Women Act of 1994), a housing assistance program administered by the Department of Agriculture under title V of the Housing Act of 1949, a housing program administered by a tribally designated housing entity (as defined in section 4(22) of the Native American Housing Assistance and Self-Determination Act of 1996) or such other affordable housing programs as the Secretary may provide, and (2) the financial benefits of the electricity produced by such facility are allocated equitably among the occupants of the dwelling units of such building. I.R.C. § 48(e)(2)(B).
 A facility is part of a “qualified low-income economic benefit project” if such facility if at least 50 percent of the financial benefits of the electricity produced by such facility are provided to households with income of (i) less than 200 percent of the poverty line (as defined in section 36B(d)(3)(A)) applicable to a family of the size involved, or (ii) less than 80 percent of area median gross income (as determined under section 142(d)(2)(B)). I.R.C. § 48(e)(2)(C).
 I.R.C. §§ 48(e)(4)(C)-(D). Note, that unallocated capacity may not be carried over from 2024 into 2025, except as to the extent permitted under section 48E(h)(4)(D)(ii) (allowing for carry-over of excess allocation into 2025 if such excess is applied to the capacity limitation established under a similar environmental justice incentive program set forth in the technology-neutral section 48E applicable for projects beginning construction after December 31, 2024).
 I.R.C. § 48(a)(15).
 IRA § 13204(c)(3).
 I.R.C. § 45V(a)(1).
 I.R.C. § 6417(b)(5).
 I.R.C. § 6417(d)(1)(B).
 See I.R.C. § 6417(d)(1)(B) (allowing a taxpayer that is not an “applicable entity” to make a direct pay election for the hydrogen “but only with respect to the credit described in subsection (b)(5),” which is the hydrogen PTC provided for in I.R.C. § 45V (but not the ITC provided for in I.R.C. § 48)).
 I.R.C. § 48C(f).
 I.R.C. § 48C(d)(1).
 I.R.C. § 45V(b)(3).
 I.R.C. § 45X(c)(1)(B).
 I.R.C. § 6417(d)(1)(D)(1)(i).
 I.R.C. § 6418(f)(1)(A)(vi).
 I.R.C. § 6418(f)(1)(A)(x).
 I.R.C. § 6418(f)(C).
 I.R.C. § 39(a)(4); IRA § 13801(g) (“amendments made by this section (i.e., § 13801, which includes the amendment to I.R.C. § 39(a)(4))) shall apply to taxable years beginning after December 31, 2022”).
 See, e.g., http://www.a-ccpa.com/content/taxguide/text/c60s15d795.php ("To claim a carryback, first, try to carry the credit back to the earliest allowable year preceding the credit year".).
 See Michael Saltzman & Leslie Book, IRS Practice & Procedure, ¶ 11.10 ("Joint Committee Review").
 See SCA 1998-001 (Jun. 12, 1997).
 I.R.C. § 56A(c)(13).
 I.R.C. § 38(c)(6)(E).