The Inflation Reduction Act (Pub. Law 117-169, H.R. 5376) contains a number of provisions that are expected to have a meaningful impact on the way tax-exempt entities (governmental and non-profit entities) finance certain renewable energy projects.
Historically, only taxpaying entities could derive a direct benefit from federal tax credit programs to offset federal income tax liabilities. In contrast, tax-exempt entities, by virtue of not paying federal income tax, could not derive the same benefit from these programs. The Act largely places tax-exempt entities on equal footing with taxpaying entities by providing direct tax credit payments for qualifying renewable energy projects, helping to offset project costs.
Opening up these tax credit programs to tax-exempt entities has the potential to transform how renewable energy projects are owned, operated, and financed. Tax-exempt entities may now participate directly in a renewable energy tax credit transaction, own and operate a renewable energy project, and receive tax credit payments from the federal government as a result of such ownership. In addition, as has been the case, tax-exempt entities may be able to finance these same projects using tax-exempt bonds, thus providing a double benefit (although it should be noted that the amount of the tax credit can be reduced by up to 15% for projects financed with tax-exempt bonds).
The Act established or renewed a host of tax credit programs. These programs are generally designed to provide a tax credit subsidy for qualified facilities that produce or store electricity, or that produce fuels, from renewable energy sources (for example, wind, solar, solid waste, geothermal, and battery technologies). The tax credits fall into two general categories: (1) a production tax credit, which is an annual credit based on the amount of energy produced and sold from a renewable energy project, and (2) an investment tax credit, which is a one-time tax credit based on the amount of qualifying costs of a renewable energy project.
The amount of the tax credit varies depending on the type of project and program, the date construction of the project begins, the date the project is placed in service, and other factors. But, generally speaking, the base rate for the production tax credit is .55 cents per kilowatt-hour (kWh) (indexed for inflation), and the base rate for the investment tax credit is 6%. However, provided that the project either (i) does not exceed 1 megawatt (1 MW) or (ii) meets federal prevailing wage and apprenticeship standards, these rates are increased considerably (by 5x), ballooning to 2.75 cents per kWh for the production tax credit and 30% for the investment tax credit. In addition, the amount of the tax credit is increased further for projects using a sufficient amount of U.S.-source construction materials and/or that are located in certain communities or locations.
Lastly, the Act also includes several other targeted tax credit programs that may be beneficial to tax-exempt entities. First, with respect to “qualified commercial vehicles” (for example, electric vehicles), tax-exempt entities can claim a tax credit for up to 30% of the cost of the vehicle, subject to per-vehicle dollar limitations ($7,500 or $40,000 depending on the type and size of the vehicle). Next, with respect to “alternative fuel vehicle refueling property” (for example, electric vehicle charging stations), tax-exempt entities can claim a tax credit for up to 30% of qualified project costs (subject to a per-project limitation of $100,000), provided the property is located either in a low-income area or a non-urban area. Lastly, the Act offers a quasi-production tax credit for certain fuels (for example, zero-emission nuclear, clean hydrogen, and other clean fuels) produced from qualified facilities.
The full text of the legislation is available here:
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Posted: Dec 8, 2022