The Inflation Reduction Act made major changes to the tax breaks available for clean energy activities. In fact, the clean energy provisions in the Inflation Reduction Act go well beyond tax changes, and include loan and grant programs under the Department of Energy.
In general, the thrust of the new provisions is to shift from a focus on the source of the energy to a focus on the result — zero to low emissions. The changes come with a number of complications as well. Taxpayers must choose from more than one possible applicable credit, with the choice forgoing use of the other credit. The level of credit available is determined by a number of new factors such as paying prevailing wages, operating apprenticeship programs, use of domestic content, and conducting activities in energy communities.
Since the enactment of the IRA last August, the IRS has been focused on trying to issue guidance on these new provisions. The agency has already missed some statutory dates for issuing proposed regulations. It has, through notices and other guidance, been trying to indicate what the guidance is likely to be, while also soliciting comments on various approaches to certain issues. The delay in guidance has resulted in some taxpayers holding off before taking action in reliance on these new provisions. Still, it is important for businesses to keep up-to-date on developments as they occur.
The old clean energy credits
There were already a number of clean energy provisions in the Tax Code before the Inflation Reduction Act. In general, these have been kept around for an additional couple of years.
The Code Sec. 45 Credit for Electricity from Renewable Resources has been extended and expanded through 2024. That extension does come with some of the new requirements and elections: prevailing wages, apprenticeship requirements, domestic content, energy communities, and cash payments for exempt organizations in lieu of the credit.
The Code Sec. 48 Energy Credit was also extended through 2024 and expanded to energy storage technology, qualified biogas property microgrid controllers, and interconnection property. An additional $10 billion was allocated under the Code Sec. 48C(e) for the Qualifying Advanced Energy Project Credit. The legislation had directed the IRS to establish the program for applications by Feb. 12, 2023.
The Code Sec. 40A(g) Biodiesel, Renewable Diesel, and Alternative Fuel Credit was extended through 2024 with some additional fuel sources retroactively extended for three years. The legislation provides a special rule for taxpayers to make retroactive claims. The Code Sec. 40(b)(6) Second Generation Biofuel Producer Credit was also extended through 2024. These are both examples of the old approach of creating credits based on the source of the fuel rather than focusing primarily on the energy-efficient results regardless of source.
Some of the old clean energy credits have been expanded. The Code Sec. 41(h) Research Credit Against Payroll Tax for Small Business has been doubled to $500,000, with up to $250,000 to be allocated against Social Security taxes and up to $250,000 against Medicare taxes. The Code Sec. 45L Energy Efficient Home Credit was also increased, however with the addition of a prevailing wage requirement.
The Code Sec. 45Q Credit for Carbon Oxide Sequestration was also modified and expanded, with the addition of wage and apprenticeship requirements.
The new clean energy credits
The Code Sec. 48D Advance Manufacturing Investment Credit was created under the CHIPS Act to promote domestic production of semiconductors and semiconductor manufacturing equipment. The IRS has issued proposed regulations on this provision. Comments were requested by May 22, 2023. The Inflation Reduction Act added an alternative Code Sec. 45X Advance Manufacturing Production Credit for many of the components of energy production.
Similarly, the Inflation Reduction Act adds a Code Sec. 45Y Clean Electricity Production Credit after 2024 and an alternative Code Sec. 48E Clean Electricity Investment Credit. Taxpayers can choose whether a tax credit for the investment or for the production is more beneficial. The Code Sec. 45Z Clean Fuel Production Credit also comes into effect after 2024.
Some of the new clean energy credits are more narrowly focused. The Code Sec. 40B Sustainable Aviation Fuel Tax Credit replaces a credit for aviation fuel produced from biodiesel. The Code Sec. 45W Credit for Commercial Clean Vehicles is similar to the clean vehicle credit for individuals, however with its own separate limits. This credit, unlike many of the other clean energy credits, is not transferable. The Code Sec. 45U Zero-Emission Nuclear Power Production Credit is more broadly focused than the preexisting credit but also adds a prevailing wage requirement.
Prevailing wage and apprenticeship requirements
The IRS issued Notice 2022-61 on Nov. 30, 2022, discussing the new prevailing wage and apprenticeship requirements. The requirements apply to credits under Code Secs. 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, and 48E and the deduction under Code Sec. 179D. The requirements became effective for projects beginning construction on or after Jan. 29, 2023. Taxpayers can find the prevailing wage requirement for their locality at
The qualified apprenticeship requirements are also specified, with applicable percentages of work required to be performed by qualified apprentices increasing over time until it reaches 15% after 2023. There are also recordkeeping requirements to assist the IRS in determining compliance.
Energy communities
In Notice 2023-29, the IRS has issued guidance on what is required to qualify for bonus tax credits for investment or production activities involving energy communities.
Cash payments and transferability
Under the Inflation Reduction Act, Code Sec. 6417 provides that many of the clean energy credits are available in the form of direct payments to exempt organizations, government entities, and tribal organizations. Direct payments for a few of the credits are also available to taxable entities.
The legislation also provides that many of the credits also permit the taxpayer to transfer the credit to another organization.
These provisions generally apply to Code Secs. 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, and 48E.
Summary
While for the most part we are still waiting for proposed regulations on many of these provisions, the IRS has tried to issue some tentative guidance in the form of notices. It will be important to continue to monitor the legislative provisions and guidance as it is issued to be prepared to act and anticipate the requirements for these new credits and the options available to choose between credits.
