The Inflation Reduction Act of 2022 and its Potential Impact on Solar and Energy Storage Systems

Solar energy has been gaining popularity in the past decade as a clean and renewable source of power. However, the high upfront cost of a solar system can be a barrier to adoption, especially for tax-exempt entities. The Inflation Reduction Act of 2022 includes provisions that will help to make solar more affordable for these organizations. The act includes a solar tax credit that can be exchanged for cash for tax-exempt entities can be used to lower the cost of solar project installations. For Water and Wastewater Districts hit by the Southern California Edison rate increase of 2022, this can be a great way to hedge energy bill risk and earn savings. By making solar more accessible and affordable, the Inflation Reduction Act of 2022 will help to accelerate the adoption of this clean and renewable technology.

ITC Extensions

The Act would extend the availability of the full investment tax credit under Section 48 of the Code (the ITC) for certain renewable energy projects construction of which begins before December 31, 2024. The ITC extension would apply to, among others, solar energy generation property, qualified fuel cell property, and waste energy recovery property.

ITC Base Credits and Multipliers

The Act establishes a new reduced base credit amount for the ITC. For an otherwise eligible project, the new base credit amount for the ITC would be 6%. If, however, a project satisfies newly added prevailing wage and apprenticeship requirements, or if those added requirements are not applicable, the base credit amount for the ITC would be multiplied by five.

Prevailing Wage and Apprenticeship Requirements

The prevailing wage provisions require that a taxpayer satisfy certain prevailing wage requirements for laborers and mechanics, including those employed by contractors and subcontractors, for wages paid during the construction of the project and for any repairs or alterations during the applicable tax credit period. The prevailing wage requirement, including the amounts of applicable prevailing wages, would be determined by the Secretary of Labor in guidance to be issued after the Act is enacted.

The prevailing wage and apprenticeship requirements would not apply to any project the construction of which begins prior to the date that is 60 days after guidance regarding those requirements is published, or that is less than 1MW-AC in power.

Domestic Content and Community Enhancements

The Act adopts a 10-percentage point adder for eligible ITC projects which satisfy “domestic content” requirements or are located in certain “energy communities.” In general, the domestic content requirement is met if the taxpayer certifies that any steel, iron, or manufactured product which is a component in the applicable project was produced in the United States.

The Act also adopts an up-to-20 percentage point adder to the ITC for solar and wind projects located in certain low-income communities or Indian land.

Each of these additional credits would apply only to property placed in service after December 31, 2022.

Expansion of the ITC

The Act would expand the types of investments in certain renewable energy property that are eligible for the ITC to include energy storage technology, qualified biogas property, and microgrid controllers. In addition, the Act would extend the option for a taxpayer to claim the ITC in lieu of the PTC for certain qualified facilities, without a phase-down, to align with the extensions to the PTC and ITC.

The expansion of the ITC to these additional types of investments apply only to property placed in service after December 31, 2022. In the case of energy storage technology, the new rules in the Act do not, on their face, modify existing rules regarding the ITC for battery storage that is part of an otherwise ITC-eligible solar energy project.

Direct Pay, Credit Transferability and Extended Carryback

The Act, would provide a “direct pay” election that would allow certain taxpayers to elect to receive cash payments (in the form of tax refunds) instead of claiming certain tax credits, including the ITC. The Act restricts the direct pay election to tax-exempt entities, any state or local government (or political subdivision thereof), the Tennessee Valley Authority, and Indian tribal government or Alaska Native Corporation.

For taxpayers that are not eligible to make the direct pay election, the Act would permit a taxpayer to sell certain tax credits, including the PTC and ITC, to an unrelated party for cash. This transferability provision would be effective for years beginning after 2022, and the credit must be transferred by the due date of the tax return for the taxable year in which the credit is determined. The seller of the tax credits would not recognize taxable income from the sale and the buyer of the tax credits could not claim a deduction for the price paid for the tax credit. In the case of partnerships and S corporations, the election would be made at the entity level rather than the owner level, but the tax-exempt treatment of income from the sale of the tax credits would pass-through to owners. Tax credits would be transferrable only once. This provision does not allow for the transfer of tax losses that can be generated by accelerated depreciation deductions available for most renewable projects.

The Act also extends the one-year carryback applicable to unused tax credits to a three-year carryback for credits eligible for the direct pay election. The direct pay provision, the credit transfer provision, and the changes to the credit carryback rules would apply for taxable years beginning after December 31, 2022.

The inclusion of up to 50% tax credit received in cash by a tax-exempt entity is sure to expand solar systems for Districts and non-profits nationwide.

Contact info@ventura.energy for more information for your facility.