Inflation Reduction Act Tax Credits

Initial Guidance provided under IRS Notice 2023-18: Link

The Inflation Reduction Act (IRA) from the Biden Administration and Congress provides one of the largest commitments to renewable energy investments in United States history. Our nation currently sits in a unique position as a top energy producer and exporter of hydrocarbons in various forms while also facing internal and external pressures to lead the transition to a more sustainable future. Various global measures exist for climate related goals like COP 2020 initiatives, Carbon 2030 and others. Most of the conferences and agreements aim to incentivize stakeholders to be more transparent in regard to their emissions impact and reduce total emissions through government subsidies of new technologies and the development of carbon credits that can be traded among carbon emitting firms in various capacities. 

Notice 2023-18 of the IRA set into law a new federal tax credit program to be administered by the IRS and government contractors. It is not the only program of its kind but is unique in the technology and materials it prioritizes and the distribution of funds. The total funding is $10B to be allocated towards renewable energy materials or technology projects/facilities that will reduce the tax burden on 30% of the capital expenditures invested in the project. No less than 40% of the tax credits must be allocated to projects that are located in “Energy Communities Census Tracts” which are an explicit list of communities identified by the federal government.

Readers will notice that the vast majority of these communities are located in the Appalachian and Rocky Mountain regions where economic activity has historically been linked to nonrenewable, extractive energy technologies like Coal mining. According to American Clean Power, a qualifying census tract is “a census tract, or adjacent census tract, where a coal mine closed after 1999 or a coal-fired generating unit was retired after 2009. Mine data is based off the MSHA dataset” and includes a link to the data with NAICS codes.

Projects that qualify for energy tax credits fall within three broad categories including:

1. Clean Energy Manufacturing and Recycling Plants

2. Greenhouse Gas Emission Reduction Projects

3. Critical Materials Projects. 

Any project application that fits within one of these categories is then assessed for technical review according to:

1. Commercial viability

2. Greenhouse gas emissions impacts

3. Strengthening U.S. Supply chains and domestic manufacturing for a net-zero economy

4. Workforce and community engagement

The legislation has specific criteria that explains these categories in more detail, but they are mostly self-explanatory. The only specific caveat is that greenhouse gas emissions projects need to be able to prove that they will reduce greenhouse gas emissions (scope 1, 2, or 3) by > 20% in order to receive credit. If a project fits the technical requirements it is recommended by the DOE and its contractors for final review by the IRS for tax credit allocation, which prioritize projects which:

1. Will provide the greatest domestic job creation (both direct and indirect) during the credit period.

2. WIll provide the greatest net impact in avoiding or reducing air pollutants or anthropogenic emissions of greenhouse gasses

3. Have the greatest potential for technological innovation and commercial development

4. Have the lowest levelized cost of generated or stored energy, or of measured reduction in energy consumption or greenhouse gas emissions based on costs of the full supply chain)

5. Have the shortest project time from certification to completion

If a project is allocated a federal tax credit from the IRS, the project owner has up to two years to notify the DOE that the project has been placed in service, at which point they will can apply the tax credit for federal income tax reporting purposes for the year in which the project has been placed in service. If the project owner does not notify the DOE that the project has been placed in service then the project owner forfeits that federal tax credit. Once the DOE acknowledges receipt of the project being placed in service, the project owner then has up to another two years to verify that the project has been placed in service in accordance with the technical specifications outlined in the project application. After this has been completed there is no ongoing certification required to receive tax credits.