New Tax Mechanisms to Promote Sustainability
With its passing, the Inflation Reduction Act of 2022 (IRA) allocated $369 billion towards clean energy and decarbonization, with a particular focus on incentivizing American innovation, competitiveness, and manufacturing. The bill, carefully crafted for political durability, finds its strength by focusing “more on carrots than sticks”. The energy tax credits, which dictate the next decade of financing, are a clear driver of sustained demand against fossil fuels by actively supporting those technologies that would displace them. Combined with industrial policy, lower consumer costs, support for domestic workers and disadvantaged communities, and GHG reduction – these provisions pack a punch.
To achieve these lofty goals, new monetization strategies and tax and social equity structures to incite and ignite change were in order. In the following, you’ll receive a compact run through of the changes to tax law to understand the logistics of how financial incentives lead us to reach our climate, labor, and equity KPIs.
Enhancing Access to Cash Funding Equity and Credit Markets
Historically, the value of a tax credit translated to the ability to reduce your tax liability. Tax-exempt entities (like non-profits or utilities) had no direct incentive to participate in programs to receive the credits, thus necessitating direct pay provisions in the IRA, where a credit earned is considered a payment of tax. Maintaining a credit amount greater than your tax liability allows for a refund check from the government. Access to cash funding equity becomes significantly easier, bypassing the typical search for an equity investor or transaction costs associated with participation in different structures while enhancing overall participation. Although direct pay is intended for tax-exempt entities, 501c3, state/local/tribal governments, etc., there are exceptions for taxable liable firms utilizing the Hydrogen Production Credit (45V), Carbon Sequestration Credit (45Q), or the Advanced Manufacturing Credit (45X).
New to the federal tax law landscape is the mechanism of credit transferability. Just as the name suggests, a credit earner can transfer the tax credit to an equity investor or unrelated taxpayer for cash. This is not considered taxable income; likewise, the purchaser cannot claim a deduction and may only offset up to 75% of their tax liability with purchased credits. This, too, results in efficient access to upfront cash equity.
Incentivizing Higher Wages through Prevailing Wage and Apprenticeship Requirements
Not only do these tax structures support clean energy, but American labor and good jobs are also promoted through the Prevailing Wage and Apprenticeship Requirements. These conditions state that laborers must receive payment greater than or equal to the going wage rate in that locality, and that an applicable percentage of the labor be performed by duly qualified apprentices. Within each credit exists a base and bonus rate. Implementing a project will earn the base rate, while hitting the criteria for fair wages and quotas for apprentice labor allows access to a bonus up to 5x the base rate. Under the Investment Tax Credit (ITC, Section 45), the base rate of 5% increases to 30% of the total basis, while under the Production Tax Credit (PTC, Section 48), the base of 0.3 cents per kilowatt hour of electricity produced increases to 1.5 cents per kWh. Satisfying the prevailing wage conditions was historically not required to receive credit, so firms that did not meet them were not automatically out of the running for bonus rates. Maximum credit reclamation is possible by repaying workers the difference between the prevailing and received wages plus interest, paying a $5000 per worker penalty to the government, and proving a good faith attempt to meet the apprenticeship quota.
In addition to supporting the workers laboring on the specific projects, bonus credits also reward American workers and domestic manufacturing by providing base rate bonuses upon certification that clean energy project components meet a domestic content standard. This also extends to projects located within an energy community (i.e., where coal, natural gas, or oil has been processed, extracted, or refined) and in an area with higher-than-average unemployment. Bonuses in this category range from 2% – 10%. In addressing economic and environmental disparities across the country, the bonus credits grant 10% – 20% of the base rate for projects located in low-income areas or those specific to advancing environmental justice.
Engaging Across the Pond
To claim a slice in this proverbial pie, your projects must be implemented within the U.S. Assuming you’re a foreign company, it is essential to form a US subsidiary and connect with a representative from the targeted region. Remember – they want your project in their district. Communicate your needs and help them help you. Engage, engage, engage.
For more information pertaining to the date and category constraints of the tax credits, please click the video below to watch our partners discuss in more detail what each of these entails.
If you would like to learn more, please don’t hesitate to contact us at info@gaccwest.com
