The Inflation Reduction Act of 2022 (the “IRA”) extended and increased the existing investment tax credit (“ITC”) under section 48 of the Internal Revenue Code and production tax credit (“PTC”) under section 45 of the Internal Revenue Code, and provided for the future replacement of those credits with similar, but technology-neutral, credits under sections 48E and 45Y of the Internal Revenue Code for projects that begin construction after 2024.
ITC Extension. The ITC is a tax credit equal to a percentage of the initial tax basis of a qualifying project at the time it is placed in service. It applies to a variety of clean energy projects, but historically the primary beneficiary has been solar projects. Prior to the enactment of the IRA, the ITC had phased down from an original rate of 30% to only 26% for projects that began construction after 2019, and was scheduled to further phase down to 22%, then 10%, in future years. The IRA extended the ITC at its full historic 30% rate, retroactive to the beginning of 2022.
PTC Extension. The PTC is a tax credit per kWh of electricity produced during the initial years of operation of a qualifying facility (for example, 10 years in the case of wind facilities) and sold to an unrelated party. It applies to a variety of clean electricity generation activities, but historically the primary beneficiary has been wind facilities. Prior to the enactment of the IRA, the PTC had phased out for projects that had not begun construction before 2022. The IRA extended the PTC at its full historic, inflation-adjusted rate, retroactive to the beginning of 2022. For example, for wind facilities placed in service in 2022, the 2022 PTC rate is 2.75 cents per kWh.
PTC for Solar. During the 15 years prior to the enactment of the IRA, solar facilities were ineligible for the PTC. Solar facilities placed in service after the enactment of IRA may elect to claim the PTC rather than the ITC.
Enhanced Credits for Domestic Content, Energy Communities, and Low-Income Communities. The IRA also allows an increased amount of ITC or PTC for projects that contain sufficient domestic content, are located in “energy communities,” or are located in low-income communities and received an allocation of credit upon application to the Treasury Department. These credit enhancements can apply separately or be stacked. For example, a solar project that qualifies for the 30% ITC may qualify for an additional 10% credit for domestic content, an additional 10% credit for location in an energy community, plus an additional 10% or 20% credit for location in a low-income community, for a total credit of 60% or 70% of the initial cost basis of the project.
Prevailing Wage and Apprenticeship Requirements. The IRA requires that the credit amounts described above be reduced by an 80% haircut if a project has a maximum net output of at least one megawatt, begins construction after January 28, 2023, and fails to satisfy “prevailing wage” and “apprenticeship” requirements detailed in the IRA.
Future Replacement of ITC and PTC with Similar Technology-Neutral Credits Under Section 45Y and 48E. For projects that begin construction after 2024, the IRA provides that the traditional ITC and PTC generally no longer apply. They are replaced by a new technology-neutral clean electricity production tax credit (similar to the PTC) under new Section 45Y and a new clean energy investment tax credit (similar to the ITC) under new Section 48E. Eligibility for these credits generally requires that the facility’s greenhouse gas emissions be no greater than zero. These credits will begin to phase out after 2032 or, if later, the year in which Treasury determines that greenhouse gas emissions from production of electricity in the United States are no more than 25% of 2022 levels.
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