Climate Smart Farming – Clean Energy Tax Incentives
It’s been a tough year for farmers with drought conditions, declining commodity prices, record-high input costs, rising interest rates and high inflation. Never has it been more important for farm owners to proactively manage their farms as businesses with forward-looking strategies to maintain strong revenues and cash flow.
The recently passed Inflation Reduction Act is allocating $369 billion to energy security and clean energy programs over the next 10 years to help the ag industry become more sustainable. Overall, the act modifies many of the current energy-related tax credits and introduces significant new credits and structures intended to facilitate long-term investment in the renewables industry.
The Food and Agricultural Organization of the United Nations defines climate smart agriculture as an approach to “transform agri-food systems toward green and climate resilient practices.”
Climate smart farming lies at the heart of the EU’s efforts to achieve climate neutrality in the land-use sector by 2035. Achieving this goal will require the buy-in not just of governments and business leaders but of farmers themselves. Here are the key takeaways from the Inflation Reduction Act and how it can help farmers.
Clean Energy Provisions:
- Production Tax Credit (PTC) and Investment Tax Credit (ITC)
The PTC and ITC are extended and enhanced with the restoration to full rates for projects that begin construction prior to January 1, 2025, subject to prevailing wage and apprenticeship requirements. Wind and solar projects are also eligible for bonus credits for projects placed in service in low-income communities. In addition, solar projects can claim the PTC and the ITC is expanded to include energy storage as well as biogas and microgrid property.
- Clean energy PTC and ITC
New technology-neutral credits will be available for qualified zero-emission facilities that begin construction after December 31, 2024. The credits start to phase out earlier in the calendar year when the annual greenhouse gas emissions from electricity production are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the U.S. for the calendar year 2022 or 2032.
- Carbon Capture Sequestration Credit
The act extends the “begin construction” date to December 31, 2032 and changes the credit rate and carbon capture requirements for both direct air capture and electricity-generating facilities. Qualification for the bonus rate requires satisfaction of prevailing wage and apprenticeship requirements and there is an option for all taxpayers to elect a direct payment of the credit for the first five years of operation.
- Clean Hydrogen
A new tax credit is established for facilities that produce clean hydrogen at a qualified facility after December 31, 2022 and begin construction before January 1, 2033. Taxpayers can claim the PTC or ITC with bonus rates subject to their fulfilling prevailing wage and apprenticeship requirements. In addition, all taxpayers can elect a direct payment of the credit for the first five years of operation.
- Alternative Refueling Property
The credit expired on December 31, 2021, and is extended and modified for properties placed in service through December 31, 2032. The eligible expenses are increased and the per-location limit is removed. However, beginning in 2023, only property placed in service in low-income or rural census tracts will be eligible for the credit. Prevailing wage and apprenticeship requirements must be satisfied to qualify for the full credit.
Additional Programs & Incentives:
Some programs already exist to help farmers manage the financial and operational barriers to implementing these climate change solutions.
- The U.S. Department of Agriculture’s Farm Service Agency has various conservation programs, such as the Emergency Conservation Program, which provides funding to farmers and ranchers for emergency water conservation measures caused by severe droughts.
- The Research and Development Tax Credit is one business incentive created by Congress to encourage American business investments in innovation to remain competitive. For years, agricultural companies across the country have been taking advantage of the tax credit, which farmers can use to invest in new technologies that push their business into a clean-energy future.
For farmers, using tax credits, USDA funds, rebates and incentive programs all help the bottom line. Climate smart farming may not be suitable for your operation, but many producers have been running the numbers to determine if an opportunity is available.
Contact your Adams Brown advisor if you would like to have a conversation about your farm’s potential with climate smart farming.