Treasury Committed to 2025 Energy Tax Credits: Cadwalader, LLP
TL/DR –
The Inflation Reduction Act (IRA), established in August 2022, has broadened the spectrum of energy tax credits by increasing amounts and expanding eligibility criteria to include new technologies. New guidelines allow entities that jointly operate projects to opt out of partnership treatment, facilitating tax-exempt entities to join with taxable investors. Despite uncertainty about the future of energy tax credits under the Trump administration, the IRA’s clean energy incentives have seen bipartisan support, with indications that credits may be scaled back instead of being fully repealed.
The Inflation Reduction Act’s Impact on Energy Tax Credits
Implemented in August 2022, the Inflation Reduction Act (IRA) boosted energy tax credits by extending credit amounts and expanding eligibility to encompass new technologies. It also introduced a “direct pay” system allowing non-profits and governmental entities with no tax liability to receive cash refunds instead of credits.
Generally, partnerships can’t avail of direct pay, but guidance released on November 20 established rules enabling jointly operated projects to opt out of partnership treatment, opening a way for tax-exempt entities to partner with taxable investors. Organizations owning and operating credit-eligible facilities with at least one owner eligible for direct pay can choose to bypass partnership treatment.
The final rules also clarify the one-year restriction on an owner’s ability to delegate authority to sell its share of electricity. The owner’s agent can enter into contracts to sell electricity for a term exceeding one year, provided the owner’s delegation of authority to the agent doesn’t surpass one year.
Trump’s tax plan aims to abolish the energy tax credits that have gained momentum over the past two years. In response, Treasury is expediting the finalization of outstanding guidance before year-end.
On December 4, the IRS confirmed the rules on the energy investment tax credit (ITC), originally enacted during the Bush administration to back solar and wind projects. The ITC will be superseded by the IRA’s technology-neutral electricity tax credits in 2025. Despite the ITC’s expected sunset, taxpayers can still claim it for eligible projects that commence construction in 2024.
The ITC final rules clarify that stored hydrogen doesn’t need to be used exclusively for energy to qualify for the credit. Moreover, an ITC can be claimed for energy storage technology sharing certain equipment with a facility also claiming a production tax credit (PTC).
The future of energy tax credits under the Trump administration remains uncertain. However, the IRA’s clean energy incentives have seen bipartisan support—particularly for biogas and consumer credits like the electric vehicle credit. A proposal to restrict eligibility is circulating, suggesting that companies owned by entities in specific foreign countries should be prevented from claiming credits.
Though there’s an existing market for credit sales, buyers are advised to ensure agreements reflect potential legal changes, especially for future credit sales. Yet, a retroactive repeal is improbable, so energy tax credit sales could continue until 2025, especially with the introduction of new technology-neutral credits.
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