The Inflation Reduction Act – A High Level Review on Energy
On Aug. 16, President Joe Biden (D) signed into law the Inflation Reduction Act of 2022.While there is a lot to unpack from the bill, the focus here is on the energy component, which aims to invest in domestic energy production and manufacturing, and to reduce carbon emissions by roughly 40% by 2030.
Key takeaways in the bill include:
- A total of $369 billion in clean energy tax credits and funding for climate and energy programs.
- The bill contains a range of incentives and tax credits to spur emissions-free energy, electric vehicles, EV chargers, nuclear power, energy storage and carbon capture, to name a few.
- Independent analysis estimates that the bill will reduce U.S. greenhouse gas (GHG) emissions 40% by 2030.
- The legislation includes $4.5 billion in funding for states to provide rebates for the purpose of new electric appliances including ranges, cooktops and wall ovens. The Department of Energy will allocate funds to individual states, and each state will choose how to use those funds.
- Incentives for domestic manufacturing, along with current potential tariffs on imported equipment, are expected to boost U.S.-made parts for solar projects.
- The Investment Tax Credit (ITC) for most on-site projects will increase from 26% to 30%.
ITC Breakdown – What’s Changed and How Does it Impact Businesses
The Internal Revenue Code provides an ITC for investments in commercial solar. This is to be used as a dollar-for-dollar reduction to U.S. federal income tax.
To qualify for the ITC, the commercial solar energy system must be located in the U.S. and be the following:
- Tangible, depreciable or amortizable property (for federal income tax purposes).
- Under the 80/20 rule, energy property may be considered new even if it contains used components as long as that portion does not exceed 20% of the total value.
- Claimed on IRS form 3468.
- The ITC for most on-site projects will increase from 26% to 30%. This is a 10-year extension of the ITC, returning to the original value of 30% and carrying it through 2032.
There is also the potential to go beyond that for commercial businesses:
- 10% bonus ITC for using domestic products/components or utilizing a brownfield.
- 20% for low-income areas.
- ITC has always been based on a date system that becomes operational, therefore most likely retroactive to Jan. 1, 2022.
- The carryback for the ITC (for companies that don’t have sufficient tax liability to offset the tax year their system was placed in service), went from one year to three, and can be carried forward 22 years for commercial businesses.
- Commercial projects over 1 MW will have the same benefits. However 60 days after the IRS guidelines come out (they have not yet, and it may take several months), they will be subject to prevailing wage and apprenticeship requirements in order to receive the 30% ITC. Requirements will be waived for any project that has commenced prior to release of guidelines. It is estimated that these requirements could raise costs by 10% or more, therefore acting now is wise.
- Keep in mind that after the site visit, proposal, approval, etc., interconnection could take months; therefore it could be close to a year before the project commences. Again, acting now is wise.
- Nonprofits and local/state government entities can get the ITC refunded to them (as they normally cannot utilize tax incentives – they do not pay taxes). Details and parameters around this will continue to unfold.
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