The Inflation Reduction Act (IRA) of 2022 introduced pivotal updates to renewable energy tax credits, creating new opportunities for businesses to reduce their federal tax liabilities while supporting sustainable energy projects. Understanding the eligibility criteria for these credits, both for projects and potential buyers, is essential for maximizing the benefits of these incentives. This post outlines seven facts about the requirements for project eligibility and the conditions under which entities can purchase these credits.
Eligibility for Renewable Energy Projects
The IRA has broadened the scope of renewable energy tax credits under both the Investment Tax Credit (ITC) and the Production Tax Credit (PTC), making them accessible to a wider array of projects.
1. Types of Projects
- Traditional and Emerging Technologies: While solar and wind energy projects have long been eligible for federal tax credits, the IRA expands eligibility to include cutting-edge technologies such as standalone energy storage systems, qualified biogas properties, clean hydrogen, advanced manufacturing (of renewable energy systems), electric vehicle infrastructure, etc. This expansion allows businesses to explore a wider range of sustainable technologies and encourages innovation in the renewable energy sector.
- Specific Use Cases: Projects involving advanced nuclear energy and carbon capture systems may also be eligible under certain conditions, reflecting the IRA’s emphasis on reducing carbon emissions across various sectors.
2. Size Requirements
- Credit Rate Variations: For projects exceeding 1 megawatt (MW), meeting prevailing wage and apprenticeship requirements is crucial to secure the maximum 30% credit rate. Projects below 1 MW or those that do not meet these labor standards are eligible for a lower base rate of 6%.
- Scaling and Incentive Structures: The tiered incentive structure encourages developers to scale their projects and invest in quality labor at market rates, thereby maximizing both environmental impact and economic return.
3. Other Credit Adders
- Domestic Content: Projects in which certain percentages of steel, iron or manufactured products that were mined, produced or manufactured in the US can qualify for an additional 10% credit.
- Energy Community: Projects located in energy communities—areas disproportionately affected by the decline of fossil fuels or with significant economic reliance on traditional energy industries—can qualify for an additional 10% credit.
- Low-Income Community: The IRA provides additional incentives for projects located in low-income communities, which often bear the brunt of environmental degradation.
4. Dual Eligibility
- Optimizing Tax Benefits: Some projects may qualify for both the ITC and PTC, offering opportunities for strategic tax planning.
- Case Studies: Projects like hybrid renewable energy installations can strategically allocate credits to different components to enhance financial returns.
Eligibility to Purchase Renewable Energy Tax Credits
The IRA’s introduction of tax credit transferability has opened the door for a broader range of entities to purchase and benefit from renewable energy tax credits.
This change simplifies the process for these entities to benefit from renewable energy incentives and eliminates the need for partnership participation of the project financing or development.
U.S. taxpayers meeting the requirements under IRC Section 469 Passive activity losses and credits (https://www.law.cornell.edu/uscode/text/26/469 ) are eligible to use the credits against their US tax liability.
5. Primary buyers of the credits
- C Corporations: Non-closely held C Corporations, who are typically exempt from Section 469 requirements. For large corporations, purchasing tax credits is a strategic tool for managing tax exposure while aligning with corporate sustainability goals.
- Other Corporate Entities including partnerships and S corporations (meeting requirements under Section 469’s Passive Activities), are eligible to utilize transferable tax credits.
- Entities with rental real estate activity. Such activity is typically deemed passive income and therefore eligible to be offset with Federal IRA tax credits.
- High-Net-Worth Individuals: Individual taxpayers, particularly high-net-worth individuals and clients of family wealth offices, with passive income tax liabilities can also utilize these credits. Trusts with similar obligations are eligible as well. Purchasing these credits can be part of a broader estate or tax planning strategy.
6. Single Transfer Rule
- Efficiency: The tax credits can only be transferred once; this rule is designed to simplify the market to provide more efficient yield for taxpayers.
- Market Stability and Integrity: By preventing subsequent transfers, the IRA maintains the stability of the tax credit market and prevents speculative trading of the credits.
7. Due Diligence Requirements
- Ensuring Compliance: Buyers of tax credits must conduct thorough due diligence to ensure that the credits meet all necessary legal requirements, such as placed-in-service, prevailing wage and apprenticeship standards, etc.
- Risk Mitigation: Companies and individuals looking to purchase these credits should engage with experienced advisors to navigate the complexities of compliance.
The eligibility criteria under the IRA for both renewable energy developers and potential buyers of tax credits are designed to incentivize a broad range of participants to engage in the clean energy economy. By understanding these criteria and conducting proper due diligence, businesses and individuals can strategically leverage these tax credits to reduce their federal tax liabilities, support renewable energy initiatives, and contribute to a sustainable future.
For a personalized consultation on how Armagh Capital can help you navigate the complexities of renewable energy tax credits and optimize your tax strategy, contact us today.
