Tax Credits in Inflation Reduction Act for Solar, Wind Projects
TL/DR –
President Biden signed the Inflation Reduction Act (IRA) on August 16, 2022, establishing provisions to strengthen the investment tax credit (ITC) and production tax credit (PTC) for wind projects. The IRA eliminates phased reductions and extends construction commencement deadlines for wind and solar projects, expanding the definition of “energy property” to include certain storage technologies and interconnection costs. The Act also allows for the one-time transfer of tax credits, extends the credit carryforward and carryback periods, and introduces new Code Sections 45Y and 48E, which replace the PTC and ITC beginning in 2025.
President Biden’s Enactment of the Inflation Reduction Act
On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. The IRA strengthens the investment tax credit (ITC) and the production tax credit for wind projects (PTC).
Phasedowns Elimination
Under previous laws, the ITC and PTC faced gradual phased reductions. Projects commencing after December 31, 2021, were ineligible for the PTC while projects started between December 31, 2016, and December 31, 2021, received a phased-down PTC.
Moreover, the ITC was set to reduce from a 30% rate for projects commencing before January 1, 2023, to a 22% rate for projects starting in 2023. With the IRA, solar projects starting in 2022, 2023, and 2024 will be eligible for a full 30% ITC, abolishing the phasedowns. The IRA extends the construction commencement deadline for wind projects qualifying for the PTC to December 31, 2024.
Interconnection Costs and Storage Property Eligibility for ITC
Previously, the ITC only covered costs related to energy-producing equipment, making interconnection costs ineligible. However, the IRA expanded the definition of eligible energy property for the ITC to include “qualified interconnection property.” Furthermore, the IRA included certain “energy storage technologies” within the “energy property” definition.
Credits Transferability
The IRA now allows tax credits to be transferred one-time to unrelated taxpayers starting in 2023. Despite offering additional flexibility, transferability might restrict the amount of equity a project sponsor can raise. With the PTC being production-based rather than cost-based, it is more likely to benefit from transferability.
Credit Carryforward/Carryback
The IRA extends the existing credit carryback period under Section 39 to three years and the credit carryforward period from 20 years to 22 years. This seems to apply only to qualified facilities placed in service after December 31, 2022.
New Sections 45Y and 48E
The IRA extends the PTC until December 31, 2024, with a phaseout beginning in 2025. It also introduces new Code Sections 45Y and 48E, effectively replacing the PTC and ITC from 2025.
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