Client Alert: Clean Energy Tax Credit

March 05, 2024

Overview of Clean Energy Tax Credits

The recently enacted Inflation Reduction Act (“IRA”) includes important new provisions related to clean energy tax credits that may have a considerable impact on your business. The IRA introduced more than 12 new tax incentives and expanded many existing tax incentives. We are providing an overview of several key tax credits below, including their availability to offset income, as well as the process for selling them to third parties.

Investment Tax Credit for Renewable Energy Projects

The IRA extends and enhances the Investment Tax Credit for various renewable energy projects. Businesses engaged in the operation or development of solar, wind, geothermal, hydrogen, clean fuel, or certain other qualified renewable energy projects may be eligible for a tax credit for a percentage of the project’s qualified investment cost. In some instances, this credit can be up to 30% or 40% of the cost of a project, so long as certain requirements under the Internal Revenue Code are met.

Production Tax Credit for Renewable Energy

The IRA extended the availability of the Production Tax Credit for renewable energy projects, which is a credit based on the amount of electricity produced by qualified facilities, such as wind farms or biofuel generator facilities. Businesses can use the Production Tax Credit to reduce their federal income tax liability over a specified period of operations, making this an excellent option for extended credit benefits.

Clean Electricity Investment Tax Credit

A new credit was announced in the IRA which applies to investments made in facilities that generate “clean” energy (meaning no emissions are produced) which are placed in service in 2025 or after. This credit starts at 6% of the project investment and can increase to a maximum credit of 70% depending on the location of the project, satisfaction of certain wage requirements, and the nature of the immediate surrounding community.

Multiple Uses For Credits

Companies can elect how to utilize the foregoing tax credits, offering taxpayers a significant degree of control and flexibility. Companies can (i) elect to apply the foregoing energy tax credits directly against their federal income tax liabilities, or in the case of partnerships or multimember LLCs, may pass the credits through to the partners or members, (ii) may sell the credits to a third party, or (iii) in some instances may take the credit in excess of tax liabilities and obtain a refund from the IRS.

Importantly, the credits can be utilized in the year the qualified project is placed in service or, in some cases, may be carried forward to future tax years if the credits exceed the current year’s tax liability. As noted, in addition to using the tax credits to offset taxable income, companies may also monetize credits by selling them to third parties. This process involves transferring the right to claim the tax credits to an investor in exchange for a negotiated amount in a tax-free exchange.

The IRA has greatly expanded available opportunities to offset income for companies involved in the renewable energy space or for investors who are involved in renewable energy projects. Given the novelty of the above tax credits and the evolving nature of the new regulatory structure associated with clean energy tax credits, we recommend consulting with our experienced tax and business attorneys to maximize the tax credit opportunities presented by the Inflation Reduction Act.

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This alert is intended to notify its readers of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.