About Renewable Energy Tax Credits
Investment Tax Credit (ITC)
The ITC is a dollar-for-dollar credit for expenses invested in renewable energy properties, most often solar developments. Inflation Reduction Act extended the ITC from 2022 through 2032 as a 30 percent credit for qualified expenditures. It then drops to 26 percent for systems installed in 20 2033 and 22 percent those installed in 2034 before it it is eliminated to 0% in 2035.
Production Tax Credit (PTC)
The federal production tax credit program–used mostly for wind developments–was first applied to facilities placed in service beginning in 1994. It was extended several times, the most recently at the end of 2015 when it was set at 2.3 cents per kilowatt hour for 2016, with a 20 percent decrease each year from 2017 through 2019, after which it sunsets. The year in which a project begins construction determines the credit rate. It is a dollar-for-dollar credit against the taxpayer’s federal income tax liability.
Inflation Reduction Act (IRA)
Labor Requirements: As mentioned above, the IRA created labor requirements as a condition to qualify for higher base and bonus tax credit rates. Below is a brief overview of those requirements.
- For the first five years of the construction, alteration and repair of an ITC project, or 10 years in the case of a PTC project, wages must be paid at a prevailing rate per the location of the project.
- During the period above, an apprentice must perform a certain percentage of the total construction hours. This percentage, for projects beginning construction in 2022, is set at 10%, increase to 12.5% in 2023 before rising to 15% for all projects with 2023 or later construction start dates.
- Projects which do not meet the labor requirement, due to paying at rate lower than that of the prevailing rate, may remedy the situation by paying affected employees the difference plus interest. However, this carries a $5,000 fee per effected employee, to be paid to the U.S. Depart of Labor.
- The apprenticeship requirement has a good-faith effort component. However, if not, a $50/hour of non-compliance penalty payable to the Department of Labor may be paid.
- In cases where project owners intentionally disregard the above labor requirement while trying to claim the higher tax credit rates, both penalties as prescribed above, increase.
The Inflation Reduction Act created and/or extended several tax credits related to renewable energy creation and storage.
- $4 billion to extend the advanced energy project credit. This credit, for the investments in advanced energy manufacturing, is an allocated credit of up to 30%.
Extension and expansion of the energy-efficient home improvement credit, including annual credits, for the following:
- $1,200 for the installation of energy efficient insulation, windows and doors.
- $2,000 for qualified electric heat pumps
- $150 for a home energy audit as conducted by a qualified inspector
- Extended the residential clean energy credit through 2034 to continue providing a 30% credit for the installation of rooftop solar system. In addition, starting in 2023, the 30% credit is available for the purchase and installation of battery storage for set solar system(s).
- Expended the energy efficient commercial building deduction to increase the level of deduction relative to the cost savings realized by the system installed by the building owner.
- Qualified tax-exempt organizations are eligible for direct payment in lieu of claiming certain energy tax credits and any organization is eligible for direct pay for clean hydrogen, carbon sequestration and advance manufacturing tax credits.
- Section 45Q carbon oxide sequestration credits is increased 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.
A provision of the American Recovery and Reinvestment Act of 2009 (ARRA) was Section 48C, which provided $2.3 billion of tax credits for manufacturing facilities related to renewables. It is a competitive credit, requiring an application to the Treasury Department. It is a credit for investing in the manufacturing of renewable energy equipment, not for the generation of it. The credit was 30% of the equipment’s cost while the initial $2.3 billion lasted, plus the additional $10 billion added by the Inflation Reduction Act. However, while the IRA expanded Section 48C by billions of dollars, it also added the labor requirements as mentioned above3. In addition, to be allocated a portion of the additional tax credits provided by the IRA for Section 48C, the manufacturing facility must first apply to the IRS to be certified for an allocation. The methodology and program by which the IRS will award these additional tax credits shall be established no later than Feb. 12, 2023. Once certified by the IRS, the manufacturing facility will have two years to place the project into service and provide evidence to its meeting the requirements established under their certification.