President Biden signed into legislation the Inflation Discount Act on August 16, 2022 (IRA). The IRA included quite a lot of provisions to strengthen the funding tax credit score (ITC) and manufacturing tax credit score for wind initiatives (PTC).

Elimination of Phasedowns

Beneath prior legislation, the ITC and PTC have been topic to a gradual, phased reductions of the relevant credit score proportion, together with elimination of the PTC for initiatives after 2021. For the PTC, initiatives that started building after December 31, 2021, have been ineligible for the PTC altogether, whereas initiatives that started building after December 31, 2016, however earlier than December 31, 2021, have been allowed a “phased down” PTC, tied to the begun building date.

Equally, the ITC was set to phasedown from a 30% charge for initiatives that started building earlier than January 1, 2023, phasing all the way down to a 22% charge for initiatives that started building throughout 2023.

Beneath the IRA, photo voltaic initiatives starting building in 2022, 2023, and 2024 shall be eligible for the total 30% ITC and can not be topic to the phasedowns described above.

For wind initiatives qualifying for the PTC, the IRA extends the development graduation deadline to December 31, 2024.

It is very important notice that for initiatives that have been positioned in service previous to 2022, the IRA doesn’t retroactively change the credit score charge accessible for these initiatives. Thus, initiatives positioned in service in 2021 will stay topic to the phasedowns and won’t qualify for extra credit. Alternatively, initiatives positioned in service in 2022, together with initiatives positioned in service earlier than passage and enactment of the IRA, could possibly make the most of larger ITC and PTC charges and thus qualify for extra credit.

Eligibility of Interconnection Prices and Storage Property for ITC

Traditionally, the ITC was restricted solely to prices (or, in a lease passthrough construction, worth) related to energy-producing gear. Thus, interconnection prices have historically been ineligible for the ITC. Nevertheless, the IRA expanded the definition of “vitality property” eligible for the ITC, to incorporate “quantities paid or incurred by the taxpayer for certified interconnection property…”

“Certified interconnection property” is outlined by the IRA to imply tangible property (apart from property related to a certified microgrid controller), which: (i) is a part of an addition, modification, or improve to a transmission or distribution system which is required at or past the interconnection level; (ii) is both constructed, reconstructed, or erected by the taxpayer, or the price of building, reconstruction, or erection is paid or incurred by the taxpayer; and (iii) the unique use of which commences with a utility pursuant to an interconnection settlement.

Moreover, batteries traditionally have been solely eligible for the ITC to the extent integrated into an ITC undertaking. Thus, standalone storage programs have been historically ineligible for the ITC. Nevertheless, the IRA amends the definition of “vitality property” to now embrace sure “vitality storage applied sciences,” outlined usually as property that receives, shops, and delivers vitality for conversion to electrical energy. 

Transferability of Credit

The IRA now permits a one-time switch of tax credit to a taxpayer who just isn’t associated to the transferor (throughout the which means of Part 267(b) or 707(b)(1) of the Code), starting in 2023. IRA additional offers that quantities acquired as consideration for such switch shall be excluded from the transferor’s gross revenue. A transferee might not additional switch the credit. Credit that are topic to a credit score carryforward or credit score carryback below Part 39 of the Code will not be eligible for switch.

Although the transferability guidelines present for additional flexibility, quite a lot of important questions stay, together with the potential results transferability might have on the tax fairness market. For instance, whereas the IRA clearly states {that a} credit score might solely be transferred as soon as, presumably, this rule wouldn’t limit a transferee that could be a passthrough entity from additional allocating the transferred credit score to its companions or shareholders, however this subject just isn’t particularly addressed within the IRA textual content.

Whereas transferability offers further flexibility in structuring investments and offers the potential to keep away from exit prices related to conventional tax fairness investments, it is very important notice that transferability might restrict the quantity of fairness a undertaking sponsor is ready to increase. For instance, pricing within the ITC area is pushed, largely, by the need to monetize accelerated depreciation deductions. Thus, it’s probably that conventional tax fairness buildings will stay prevalent in ITC transactions. Alternatively, the PTC, which is calculated primarily based upon manufacturing relatively than value, just isn’t dependent upon depreciation, and due to this fact is extra more likely to profit from transferability.

Credit score Carryforward/Carryback

IRA extends the present one-year credit score carryback interval below Part 39 to 3 years, and the credit score carryforward interval from 20 years to 22 years. With respect to PTCs, this seems to use solely to certified amenities positioned in service after December 31, 2022. 

New Sections 45Y and 48E

As famous above, the IRA extends the PTC till December 31, 2024, which successfully phases out the PTC starting in 2025. The IRA equally features a phaseout for the ITC for initiatives that start building after 2024. Nevertheless, the textual content of IRA consists of new Code Sections 45Y (Clear Electrical energy Manufacturing Credit score, or CEPTC) and 48E (Clear Electrical energy Funding Credit score, or CEITC), which successfully exchange the PTC and ITC starting in 2025.

The CEPTC and CEITC every present for a base credit score together with another charge if the undertaking satisfies sure necessities.