Tax Strategy: Inside the Inflation Reduction Act legislation

The legislation includes a wide variety of provisions in support of green energy, estimated to cost $370 billion over 10 years, and a few in support of fossil fuels as well. Some of these provisions extend or expand existing tax provisions while others create new incentives. Extended provisions include the Code Sec. 45 Production Tax Credit, to the beginning of 2025, and the Code Sec. 48 Investment Tax Credit, to the start of 2025, with geothermal projects given an extension to the beginning of 2035 and electricity produced by zero-emissions projects to the beginning of 2033, and with expanded eligible equipment. The Code Sec 45Q Carbon Capture Credit is extended to the beginning of 2033. The Code Sec. 48C Advance Energy Project Credit would be expanded to include certain clean energy manufacturing facilities.

New provisions include a production tax credit for clean hydrogen starting in 2023 and ending after 2032, a credit for sustainable aviation fuel, and a new Advance Manufacturing Production Credit to promote domestic production of green energy components and critical materials. New tax credits have also been created for zero-emission nuclear power production and fuels with lower emissions.

Other changes provide for enhanced rates when prevailing wage and apprenticeship requirements are met and enhanced credits when domestic content or favored location requirements are met. Other enhancements include the ability to transfer energy tax credits, a three-year carryback period, and an option to obtain the credits through a direct pay option.

The plug-in electric vehicle credit, which is now called the Clean Vehicle Credit and includes fuel-cell and hydrogen vehicles, is extended through 2032, and the 200,000 vehicle cap per manufacturer is lifted. In addition to the $7,500 credit for new vehicles, there is a new $4,000 credit for used vehicles. Purchasers also have the option to get the credit as a price reduction at the time of purchase. However, the legislation also imposes restrictions requiring increased sourcing over time of components from the U.S. or other countries with which the U.S. has free trade agreements, puts limits on the price of eligible vehicles, and puts limits on the incomes of eligible taxpayers. These restrictions may limit the vehicles eligible for the credit for some period of time.

The $500 lifetime Nonbusiness Energy Property Credit transforms into a $1,200 annual credit. Rebates of up to $14,000 would be available to assist in installation of certain energy-efficient home installations and rebates of up to $4,000, or $8,000 for low- and moderate-income households, for retrofitting homes based on projected energy savings. Rebates may in some cases be available at the time of sale. HUD housing is also authorized grants to upgrade public housing. Tax credits for developers of energy-efficient homes are also enhanced.

The Residential Energy Efficient Property Credit, which includes solar and small wind installations, which was already starting to phase out, was extended as a 30% credit through 2032. Tax credits were also made available for low-income community solar projects and apartment complexes. Small businesses can qualify for tax deductions of up to $1 per square foot for energy-efficient expenditures and a 30% credit for conversion to clean vehicles. 

There are also some non-tax provisions to assist drought-stricken parts of the country.

In order to obtain passage, the legislation also expands oil and gas leasing in the Gulf of Mexico and Alaska and promotes some pipeline construction.