Maximizing Renewable Energy Credits Under the Inflation Reduction Act: A Checklist for Energy Companies
Understanding the Inflation Reduction Act and Its Impact on Renewable Energy
The energy industry is evolving rapidly, and the recent Inflation Reduction Act (IRA) is one of the latest examples of how government policies can significantly impact the sector. The new law allocates $369 billion for clean energy programs and energy security over the next decade, providing a historic opportunity for energy companies to invest in renewable energy and maximize tax benefits. However, the complex features of the IRA require careful review and assessment to navigate the changes and ensure compliance. This article presents a checklist of key focus areas and next steps for energy companies to maximize their tax benefits under the new law.
- Conduct a Holistic Review of Current and Future Projects
To maximize the tax benefits available under the IRA, companies should conduct a comprehensive review of their current and forecasted projects to determine which ones may qualify for credits under the new law. This review should consider the following factors:
- The project type and whether it qualifies for the base or bonus credit rate.
- The materials used in the project and whether they meet the requirements for the bonus credit.
- The location of the project and whether it qualifies for any location-based credits.
- The prevailing wage and apprenticeship requirements and whether they can be satisfied.
By taking a holistic approach to this review, companies can better understand the potential impact on their total tax position, capture all available credits and plan future projects in a manner that maximizes potential savings.
- Choose Which Tax Credit Provides the Most Beneficial Incentive
Renewable energy projects may be eligible for more than one type of credit, but in most instances, companies can claim only one type of credit per project. To determine which credit is most advantageous for a specific project, companies should consider the following factors:
- The timeline for the project and when the credit can be claimed.
- The capacity of the project and how it impacts the credit rate.
- The capital costs of the project and how they impact the credit rate.
- Understand the Two-Tier Credit System of Base and Bonus Rates
The IRA introduces a two-tier credit system of base and bonus rates. The bonus rate is up to five times the base rate, but specific wage and apprenticeship requirements must be satisfied to qualify for the full bonus rate. During the initial review process, companies should determine whether the larger credit amount received under the bonus rate justifies the additional time and expense necessary to satisfy the requirements.
- Understand the Requirements When Working with a Third Party
When working with third-party contractors, there may be a learning curve for both companies and contractors to understand the specific requirements for IRA credits. Businesses will need to determine what information needs to be shared to meet the requirements, which may be challenging for contractors regarding their pricing and markup policies. To ensure that all conditions are satisfied, companies may need to review their contracts with third-party contractors and add specific provisions related to compliance with tax credit requirements.
- Determine How New Tax Credits Will Affect Current Projects
With new tax credits, evaluating whether existing projects are eligible for these credits is essential. Companies must also determine if the requirements will increase the costs and time for completion. Wage and apprenticeship requirements, for instance, could prove challenging if not factored into the cost previously. Companies can benefit from running a cost-benefit analysis to avoid unexpected delays in making informed decisions.
- Renegotiate Contracts to Reflect Compliance with Tax Credit Requirements
It is important to revise contracts with third-party contractors to reflect the new tax credit requirements. Engineering, procurement and construction (EPC) contracts are typically fixed in price, while operation and maintenance (O&M) contracts can vary widely. Companies should evaluate their contracts and identify the clauses related to indemnification and compliance with tax credit requirements.
- Consider Purchasing an Insurance Policy on Tax Credits
While insurance has been available for some types of tax credits, the insurance market for renewable energy credits is still developing. Companies should consider whether they should purchase an insurance policy on the tax credits. The policy will cover the risk of non-compliance with tax credit requirements and unexpected delays in project completion.
- Explore New Tax Credit Monetization Options
Companies without significant tax liability can now sell tax credits under the new direct transfer rules. Previously, such companies pursued a tax equity structure to monetize project tax benefits. Management should weigh both options to determine the best path forward for the business.
The IRA represents a significant opportunity for energy companies to maximize tax benefits and invest in renewable energy. While the IRA introduces complex features, taking a holistic approach and carefully assessing forecasts and project options can help businesses understand the potential impact on total tax position and plan future projects to maximize potential savings. Contact an Adams Brown advisor with any questions or to discuss tax planning.