Inflation Reduction Act Offers Tax Credit Enhancements for Solar, Wind Projects

The Inflation Reduction Act of 2022 (IRA) unleashed the opportunity for tribes to take advantage of valuable tax incentives (see Holland & Knight's previous alert, "Tribal Provisions in the Inflation Reduction Act Address Energy, Climate Change," Dec. 13, 2022). Specifically, as a result of the ability to elect for direct payment of various tax credits, tribes – which are not subject to federal income tax – can immediately benefit.

There are many tax incentives included in the IRA. The value of these incentives can be enhanced when certain criteria are met. Once such enhancement, found at Section 48(e) of the Internal Revenue Code, is when smaller solar and wind facilities are placed in service in low-income communities or on Indian land. If an allocation under this new program is received, the value of the tax credit is enhanced by 10 percent to 20 percent. Further information on this program can be found in our alert, "Treasury Department, IRS Release Preliminary Low-Income Community Bonus Credit Guidance," Feb. 17, 2023.

An example of how tribes can take advantage of just one of the many tax credits in the IRA, and how the enhancement might work, is as follows:

• A tribe purchases and places into service solar panels to put on the roof of its administrative building, thereby generating electricity for the facility. The solar panels cost $500,000. Under the IRA, the tax credit eligible for direct payment is generally 6 percent of this cost, or $30,000. However, the value of the credit is increased if additional conditions are met – if certain labor conditions are satisfied or if the output is less than 1 megawatt (MW), the credit is increased by five-fold, to 30 percent, or $150,000 in this example.

Additional bonus amounts of 10 percent each are also available, increasing the value if either certain domestic content requirements are met (i.e., the products were produced in the U.S.) and/or the solar panels are placed in areas designated as energy communities. This alone would increase the value of the tax credit to 50 percent, or $250,000 in this example. Further enhancers can increase the credit to as much as 70 percent of the cost of the energy property, or $350,000 in this example.

Given their tax-exempt nature, tribes previously could not leverage tax credits without complicated structures involving third parties. However, as a result of the direct pay option, under the example, the tribe could seek direct payment of $350,000 for the cost of its $500,000 solar panel. The cost of the solar panels in this example may also qualify for federal funding (such as a U.S. Department of Energy grant or as an eligible use of Coronavirus State and Fiscal Recovery Funds), presenting further incentives for tribes to explore energy-related projects in their communities.