Renewable Energy Provisions Get Boost in IRA–And Key Community Development Tax Incentive Provisions Could Still Be Enacted This Year
Supporters of renewable and clean energy tax incentives celebrated major a legislative achievement when President Joe Biden signed the Inflation Reduction Act into law: The reconciliation legislation significantly increases renewable and clean energy resources, including extensions of the investment tax credit (ITC) and production tax credit (PTC), making standalone energy storage eligible for the ITC, and enacting direct pay and tax credit transferability options.
Unfortunately, the legislation did not include many affordable housing and community development provisions that were part of the original Build Back Better Act (BBBA), which was the Democratic Party’s first attempt at reconciliation legislation.
There remains a solid chance that at least some of the remaining BBBA tax provisions could be enacted by the end of 2022, although surely at a substantially lower dollar total than originally proposed. There are several factors that will influence potential legislation, starting with what became law in August.
IRA Provisions and Next Steps
While the scope of the IRA is less than the BBBA (there are far fewer provisions and the Congressional Budget Office estimates the IRA will offset the deficit by $238 billion, compared to a $574 billion deficit reduction for the House-passed version of the BBBA), the IRA retains many of the renewable and clean energy provisions.
The IRA effectively extends the ITC at 30% and the PTC at $26 per megawatt hour adjusted annually for inflation through 2032. Technically speaking, the ITC and PTC are extended through the end of 2024 and beginning Jan. 1, 2025, both the ITC and PTC transition to technology-neutral credits, but the rates remain at the recently enacted higher levels.
The bill makes energy storage and interconnection property eligible for the ITC.
The law creates additional tax credit monetization options. Qualifying tax-exempt organizations, state and local government entities, Indian tribes and Alaska native claims corporations are eligible for direct payment in lieu of claiming certain energy tax credits. Note that clean hydrogen, carbon sequestration and advance manufacturing tax credits are eligible for direct pay (for five years) regardless of whether an organization is tax-exempt.
The IRA also creates a tax credit monetization option for taxable entities, namely the ability to transfer all or a portion of their eligible credits to unrelated parties for cash, with proceeds from the transfer not counting as taxable income.
The IRA increases the Section 45Q carbon oxide sequestration tax credit by 70% (from $50 per metric ton to $85 per metric ton) for any carbon capture, direct air capture or carbon utilization project beginning construction before 2033.
The new law includes provisions to further encourage including renewable energy facilities in affordable housing and community development projects. Under the IRA, low-income housing tax credit (LIHTC) eligible basis is no longer reduced by the ITC basis adjustment, an additional 20% in credits can be claimed for ITC facilities in covered federal affordable housing programs and a 10% bonus can be claimed for ITC use in low-income communities (subject to a 1.8 gigawatt calendar year limitation). When combined with other incentives in the law, as much as a 70% ITC could be generated by some renewable energy facilities included in LIHTC properties.
The IRA extends the Section 45L new energy-efficient home credit for 10 years and no longer reduces basis for LIHTC properties. The new law makes the Section 179D energy-efficient commercial property deduction (which can be used for multifamily housing) easier to access. The IRA extends and enhances both the Section 25C nonbusiness energy property credit and IRC Section 25D residential energy-efficient property credit.
While the clean energy world saw much of its wish list granted in the IRA, proponents of other development tax incentives must now shift their focus to Congress, where Democrats and Republicans may be motivated to pass a bill with tax provisions after the coming November elections and before the end of 2022.
Motivation for Republicans, Democrats
Community development stakeholders continue to seek tax provisions that would extend, enhance and expand the benefits of community development tax incentives. Those include reinstating the 12.5% annual increase in 9% LIHTC allocations that expired at the end of 2021, reducing the 50% financed-by test for tax-exempt private activity bond-financed housing, making permanent the new markets tax credit (NMTC) and implementing provisions of the Historic Tax Credit Growth and Opportunity (HTC-GO) Act.
There are plenty of other tax provisions desired by both sides of the House and Senate. Democrats are the more vocal advocates for most affordable housing and community development tax legislation; with several Republicans expressing concrete desires regarding other tax incentives, including extension of (and other changes to) the opportunity zones (OZ) incentive. Many members of Congress also hope to delay the phasedown beginning in 2023 of bonus depreciation and extend the ability to take full expensing and amortization of research and development expenses.
The bottom line: many Democrats and Republicans have various tax provisions that would like to see extended, expanded or altered. That provides a headwind for a year-end bill that includes those incentives.
While a standalone bill with tax provisions is technically possible, it’s far more likely that any tax provisions would be attached to another bill. As this column was going to press, Congress was expected to pass a continuing resolution to fund the government past its Sept. 30 year-end until after the November election, likely to Dec. 16. At that point, two major legislative vehicles would remain–the annual defense policy legislation and a fiscal year 2023 omnibus appropriations bill. Both are possible vehicles for tax legislation, with the omnibus spending bill considered the more likely choice.
Community development advocates are looking to the omnibus spending bill as a tax vehicle based on recent history. For example, the 2018 omnibus bill included a 12.5% increase in 9% allocations and LIHTC average-income set-aside option and the 2020 omnibus spending legislation included the 4% LIHTC minimum rate and a five-year extension of the NMTC.
Advocates are optimistic an omnibus bill will be passed before the end of 2022. One reason for this “by year-end” optimism is that the two lead members of the Senate Appropriations Committee (Patrick Leahy, D-Vermont, and Richard Shelby, R-Alabama) are retiring at the end of 2022. Each supports hundreds of millions of dollars in desired earmarks that will only be enacted on these two Senators’ watch if Congress passes a spending bill before the end of the current 117th Congress, which ends Jan. 3, 2023.
Before the 117th Congress ends and the 118th Congress starts in January, we have Election Day (Nov. 8) for every House district and 34 of the 100 Senate seats.
While the winners of the Nov. 8 election don’t take office until January, the midterm election results will cast a shadow over the post-election lame duck session. As of this writing, most election pundits believe Republicans will regain control of the House of Representatives given the narrow margin, while the Senate is a toss-up.
The results of the election will play a role in what to expect in a lame duck session, but the atmosphere for a year-end tax bill remains regardless–with the possible exception of “Red Wave” election in which Republicans take control of the Senate and roll up a large majority in the House. In that case, GOP leaders may elect to wait and negotiate such legislation with President Biden in 2023. Other scenarios–including the longshot possibility of the Democratic Party holding the Senate and retaining the House–will likely see a year-end bill to clear the deck for the next session of Congress.
Priorities for Community Development
There are six major proposals sought by community development practitioners in a year-end tax bill:
- restoring the 12.5% increase in annual 9% LIHTC allocations and potentially providing a further increase as budgetary constraints allow,
- lowering the 50% financed-by threshold for affordable housing financed by private activity bonds,
- creating the neighborhood homes tax credit (NHTC),
- providing NMTC permanence and alternative minimum tax relief,
- enacting portions of the HTC-GO Act, and
- extending and improving the OZ incentive.
The return to an annual 12.5% boost in LIHTC allocation (which expired at the end of 2021) is the most obvious item to be added to a tax-extender package, since it is an expired, popular provision that is threatened with extinction if not included in legislation. Democratic leaders may propose extending the increased allocation amount at least through 2025, when a massive bundle of tax provisions–including those passed at the end of 2017–expire, which will then require some action by Congress.
Two other housing provisions could be similarly addressed this year: a decrease in the 50% financed-by test for private-activity bonds in affordable housing and the NHTC. Lowering the 50% test to 25% comes at a notable cost (the Joint Committee of Taxation estimated it would cost more than $11 billion over 10 years), so any inclusion in year-end legislation would likely be a short-term change to encourage the development of more affordable housing in bond-cap-constrained states. The NHTC–which would incentivize the development and renovation of single-family housing in distressed neighborhoods–is an incentive included in the BBBA that could be enacted (possibly with a 2025 expiration date). Again, Congressional leaders could negotiate to pass the NHTC at a level lower than the proposed per-capita rate of $6 million with an $8 million small-state minimum allocation.
Permanence for the NMTC, alternative minimum tax relief and the inclusion of some of the provisions of the HTC-GO Act also are priorities. While they lack the urgency of the housing provisions, each could gain support. The current extension of the NMTC doesn’t expire until 2025, but current House Ways and Means Committee Chair Richard Neal, a longtime supporter of the NMTC, could push for permanence as one of his final acts as the leader of the committee, should the House flip to Republican control. Furthermore, NMTC permanence would cost less if enacted this year as compared to 2025, when the current five-year extension expires.
Provisions concerning the OZ incentive–which could include a two-year extension, reporting requirements and early sunsetting for some census tracts–will likely be desired by Republicans and creates an area where the parties can find agreement.
There’s no guarantee Congress will pass a year-end tax bill (or, if there is one, what will be included). This is why now is a crucial time for advocates. The gold standard in advocacy is to bring members of Congress to properties, businesses and community amenities financed by community development tax incentives. With the election in early November, candidates for the House and members of the Senate (whether running for a seat or not) are often in their home state or district in October, which makes this month a prime time to ensure that elected officials know the value of such incentives.
The IRA provided a major win for clean energy tax incentives in August. Affordable housing and community development stakeholders are working toward a second win through a year-end tax package.
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