Renewable tax credit changes under the Inflation Reduction Act of 2022
By Toria Lessman - Head of Transactional Liability, Daniella Nieh - VP, Underwriting Leader and Hannah Tucker - AVP, Underwriting Leader
The Senate and the House passed The Inflation Reduction Act (the “Act”), and President Biden has officially signed it into law. One of the major goals of this Act is to combat climate change and lower carbon emissions. To accomplish this, the Act will allow taxpayers to take advantage of tax credits from their renewable energy projects. Below are a few notable changes from the Act:
PTC and ITC term: The Act extends production tax credits (“PTC”) and investment tax credits (“ITC”) for facilities that begin construction before January 1, 2025, for an additional 10 years. Wind projects that began construction before the end of 2021 and are placed in service in 2022 or later will be eligible for the full PTC. Before the Act, the ITC was limited to a 30% ITC percentage (then reduced to 26% and scheduled to be reduced again) for projects beginning construction after 2019. Now, projects that began construction prior to 2025 and are placed in service after 2021 are eligible for the full 30% ITC, with no phase down percentages.
Technologies that qualify for PTC and ITC: PTC and ITC qualifying facilities will now expand to include a larger variety, allowing for more taxpayers to take advantage of these types of credits. For PTC’s, this list includes wind, closed and open loop biomass, geothermal, landfill gas, trash, qualified hydropower, marine and hydrokinetic facilities. For ITC’s, this list includes solar, fiber-optic solar, qualified fuel cell, qualified microturbine, combined heat and power system, qualified small wind, and waste energy recovery properties.
Standalone battery storage qualification for ITC: The Act adds standalone energy storage projects (i.e., not directly connected to a source of solar-generated electricity) as qualifying facilities eligible for the ITC. These types of projects with a minimum capacity of five kWh now meet ITC eligibility. Previously, it was more challenging for these standalone projects to meet the ITC requirements because they had to establish a source charge that could be traced to a solar generating facility, not just a power grid. As a result of the Act, storage could ultimately become more affordable, allow more taxpayers to engage in the development of these projects, and could further future decarbonization efforts.
Section 45Q carbon oxide sequestration credits: The beginning of construction deadline, which was previously January 1, 2026, has now been extended to January 1, 2033. In addition, the amount of credit available has increased and the annual capture requirements have decreased. This credit is subject to a two-tiered credit regime, with a lower base rate and a higher bonus rate. Taxpayers can now also elect to have the 12-year credit term begin on the first day of the first tax year in which the Section 45Q credit is claimed (assuming certain conditions are met). Given these favorable changes, we would expect more qualified carbon oxide projects to begin, allowing more taxpayers to take advantage of this credit.
Direct pay option: For taxable years beginning after December 31, 2022, and before January 1, 2033, taxable businesses may elect to receive certain tax credits through direct payment in lieu of a credit. This allows these credits to be more of a “refundable” credit. The election must be made no later than the due date for the tax return of the year in which the election is made.
Transfer of tax credits: The Act permits taxpayers to transfer all or any portion of an applicable PTC or ITC to an unrelated party after December 31, 2022. Any consideration paid in respect of the transferred credit must be paid in cash, and a 20% penalty may apply if the claimed credit amount is excessive. The election to transfer must be made no later than the due date for the tax return of the year in which the credit is determined. Once made, the election is irrevocable.
While these changes are evolving and it will take some time for the tax industry to fully comprehend its impact, the Act will ultimately help with tax equity financing, which is beneficial for the tax insurance market.