April 6, 2023

Inflation Reduction Act of 2022: Business Energy Investment Tax Credit

Holland & Knight Retail and Commercial Development and Leasing Blog

Marcy Hart | Holly R. Camisa | Maria Z. Cortes | Olufunke Leroy

The IRS is currently in the process of implementing the Inflation Reduction Act of 2022 (IRA), which addresses energy, tax and health policy. The IRA offers, among other incentives, tax credits to an array of organizations (e.g., businesses, nonprofits, educational institutions, and state, local, and tribal governments). For additional background on the IRA as it relates to the real estate industry, see Holland & Knight's previous blog post, "Inflation Reduction Act Offers a Variety of Green Building Tax Incentives," March 31, 2023.

Among the IRA tax credits is the Business Energy Investment Tax Credit (ITC). The ITC is a corporate tax credit available to the commercial, industrial, investor-owned utility, cooperative utilities and agricultural sectors. The eligible technologies include solar water heat, solar space heat, geothermal electric, solar thermal electric, solar thermal process heat, solar photovoltaics (PV), wind, geothermal heat pumps, municipal solid waste, combined heat and power, fuel cells using non-renewable fuels, tidal, geothermal direct use, fuel cells using renewable fuels, microturbines, offshore wind biogas, microgrid controllers, interconnection property and lithium-ion. Multiple bonus credits are available.

Eligible taxpayers may transfer all or a portion of their eligible tax credits to an unrelated taxpayer. Only one such transfer is permitted and must be reported to the IRS.

Base Credits

The base credit amount is between 6 percent and 30 percent, depending on the status of the project and certain labor factors.

Projects under 1 megawatt (MW) that began construction after 2021 and begin construction before 2025 are eligible to receive the full tax credit of 30 percent.

Projects that commence construction on or after Jan. 1, 2025, are eligible to receive a tax credit under the new Clean Electricity Investment Tax Credit (described below).

Projects of more than 1 MW that begin construction on or after Jan. 29, 2023, and no later than Jan. 1, 2025, will receive a base tax credit of 6 percent. Such projects, however, can qualify for the full 30 percent tax credit by ensuring that all laborers and mechanics involved in the construction of the project or the maintenance of the project for five years after project's completion are paid wages at rates not less than prevailing wages. A percentage of total labor hours must also be performed by qualified apprentices. That percentage increases over time to a maximum requirement of 15 percent from 2024 or after.

Projects that commence construction on or after Jan. 1, 2025, can receive a tax credit under the new Clean Electricity Investment Tax Credit, which is functionally similar to the ITC, but it is not technology-specific, applying instead to all generation facilities and energy storage systems that have an anticipated greenhouse gas (GHG) emissions rate of zero. The credit amount will begin the same as under the IRA but will be phased out as the U.S. meets GHG emission reduction targets.

Bonus Credits

To be eligible for the Domestic Content Bonus, 100 percent of the steel or iron used for the project facility must be produced in the United States, and 40 percent of the manufactured products that are components of the facility must be produced in the United States. The Domestic Content Bonus increases the tax credit by 10 percent for projects under 1 MW and projects greater than 1 MW that meet the above described labor requirements. The Domestic Content Bonus increases the tax credit by 2 percent for larger products that do not meet the labor requirements.

To receive the Energy Community Bonus, a facility must be located in one of the following:

a brownfield site
a metropolitan or non-metropolitan statistical area that either
- has (or, at any time during the period beginning after Dec. 31, 2009, had) 0.17 percent or greater direct employment, or 25 percent or greater local tax revenues related to the extraction, processing, transport or storage of coal, oil or natural gas
- has an unemployment rate above the national average for the previous year
a census tract or a census tract that is adjoining a census tract in which a coal mine has closed after 1999 or a coal-fired electric generating unit was retired after 2009

The Energy Community Bonus increases the tax credit by 10 percent for projects under 1 MW and projects larger than 1 MW that meet the labor requirements specified above. The Energy Community Bonus increases the tax credit by 2 percent for larger projects that do not meet the labor requirements.

Solar and wind facilities of less than 5 MW may be eligible for low-income bonuses. A project built in a low-income community (as defined by the New Markets Tax Credit) or on tribal land may be eligible for a 10 percent tax credit increase, and a project associated with a low-income residential building project or a low-income economic benefit project may be eligible a 20 percent tax credit increase.