Harnessing Renewable Energy Tax Credits for Businesses

BY

The Inflation Reduction Act of 2022, Pub. L. No. 117-169, 136 Stat. 1818 (the “IRA”) provides businesses, including banks, credit unions, and other financial institutions, with an opportunity to reduce their tax liability by channeling investments into eligible renewable energy projects—simultaneously improving the economic and environmental condition of their communities.  Two of the IRA’s biggest opportunities for businesses are the production tax credit for electricity from renewables (the “PTC”) (26 U.S.C. § 45) and the investment tax credit for energy property (the “ITC”) (26 U.S.C. § 48).  Developers, lenders, and investors can use either, but generally not both, of these tax credits to defray the costs of completing and operating eligible renewable energy projects while reducing the amount of taxes that they owe.

The Base Credits

The PTC, on the one hand, provides a credit of 0.3 cents (adjusted for inflation) per kilowatt hour (kWh) of electricity produced from a qualified energy resource during the first ten years after a qualified facility is placed into service.  Qualified facilities that are eligible for the PTC may include, among others, certain of those that generate electricity from certain renewable energy sources, including solar, wind, hydropower, geothermal, or biomass, to name a few.  The ITC, on the other hand, generally provides a credit of 6% of the taxpayer’s qualified investment in “energy property,” as that term is defined in the IRA.  “Energy property” that may be eligible for the ITC includes, among other types of property, equipment used to generate electricity from solar, wind, or geothermal sources, as well as fuel cell and energy storage equipment.

Credit Bonuses

The amount of both the PTC and the ITC can be increased if the associated project meets certain requirements.  For example, a project that meets prevailing wage and registered apprenticeship requirements is eligible for its associated tax credit to be multiplied by a factor of five—bringing the PTC amount to 1.5 cents per kW (adjusted for inflation) and the ITC to 30% of the qualified investment.  Meeting requirements associated with using domestically produced steel, iron, and manufactured products can earn a project another 10% increase over the exiting bonus, and an additional 10% increase is available if the project is located in an “energy community” (as that term is defined in the IRA).

Sunset and Replacement in 2025

Both the PTC and ITC are only available for eligible projects that begin construction prior to January 1st of 2025.  At that point, the PTC and ITC will sunset and be replaced by the Clean Electricity Production Tax Credit (26 U.S.C. § 45Y) and the Clean Electricity Investment Tax Credit (26 U.S.C. § 48E).  The Clean Electricity PTC and Clean Electricity ITC are similar in many respects to the PTC and ITC that they will be replacing; however, the credits that take effect in 2025 are technology-neutral in the sense that they apply to any electricity-generating facility that does not have a greenhouse gas emission rate over zero.

Taking Advantage of These Credits

These tax credits provide an enormous opportunity for businesses to reduce their tax burden while aiding in the transition to a clean energy economy.  However, there are quite a few boxes that these projects and businesses’ investments in them will need to check in order for the business to be eligible to claim these credits on their tax returns.  For example, a developer, lender or investor is only eligible to claim these credits for a project that the investor holds an ownership interest in.  As such, extending credit to a clean energy developer will not entitle a creditor to these tax advantages.  Many businesses, including banks, credit unions, and financial institutions may not have an appetite for the type of equity investment required to take advantage of these opportunities.  It is also important to note that there may be certain pre-application requirements that will need to be satisfied with the IRS prior to utilization of the credits. Businesses should seek the advice of a lawyer and/or a tax professional in order to ensure that the clean energy project they are investing in is eligible for one or both of these credits, that it is structured to maximize the project’s tax benefits, and that the investors’ participation in it qualifies them to claim the associated credit on their tax returns.

If you or your business has any questions about whether a clean energy project is eligible for the PTC, ITC, or one of their successor tax credits, or if you want to make sure that your investment in the project qualifies you to claim the associated tax credit, you should consult with an attorney and/or a tax professional to determine the appropriate course of action to pursue.  If you would like assistance with these matters, please contact David Johnson or Andrew Hersom at Perkins Thompson by email or by phone at (207) 774-2635.