Tax incentives and rebates are an important aspect of energy advancements and should be factored when evaluating your decision on adding solar, battery storage or electric vehicle charging stations.

The Inflation Reduction Act of 2022 is an incredibly complex law that holds significant implications for the renewable energy industry-but what are they?

In written form, the Act spans beyond 700 pages and makes certain fundamental changes to the structure of tax credits that were previously put in place for the industry. Most of us have little time to decipher and decode the latest changes, so Hannah Solar would like to help you make sense of the newest incentives and answer some of the questions you may have about how they would apply to your business.

What tax credits are available for businesses, nonprofits, and local governments?

  • Investment Tax Credit (ITC)
    Reduces federal income tax liability for a percentage of the cost of a solar system installed during the tax year.
  • Production Tax Credit (PTC)
    A tax credit based on a “per kilowatt-hour” (kWh) basis for electricity generated by solar and other qualifying technologies for the first 10 years of operation. It reduces the federal income tax liability and is adjusted for inflation.

Can the ITC and PTC be claimed for the same property?

  • Unfortunately, no
    Project owners cannot claim both credits for the same property. They may, however, be able to claim different credits for co-located systems (for example, solar and storage).
    The IRS provides guidance on what types of renewable energy and storage technologies are eligible.

When can a business claim an ITC or PTC and what are the incentives?

Solar sytems that are placed in service in 2022 or later and begin construction prior to 2033 are eligible for the following benefits-provided they meet labor requirements issued by the Treasury Department or are under 1 megawatt (MW) in size:

  • Investment Tax Credit (ITC)
    30% ITC
  • Production Tax Credit (PTC)

What are the eligibility requirements to qualify for an ITC or PTC?

For a project to qualify for an ITC or PTC, the solar system must be:

  • Located in the United States or U.S. territories
  • Projects must use new or limited previously used equipment
  • The project cannot be leased to a tax-exempt entity. Tax exempt entities, however, are eligible to receive an ITC in the form of a direct payment.

Should I opt for an ITC or a PTC?

The decision to choose an ITC or PTC depends on several variables, but project cost is perhaps the ultimate qualifier, and many planners will look for bonus tax credits to help offset their budgets.

Small PV and battery projects will likely benefit more when utilizing the ITC-especially if they can utilize a low-income bonus. The ITC is an upfront tax credit and does not vary with system performance. The ITC is a great option when installation costs are excessive, and the project is located in less sunny areas.

Larger scale PV projects should opt for the PTC because they provide an attractive cash flow because the credits are earned over time. A production tax credit, as its name implies, is calculated as a measurement of the electricity produced by the system.

What is considered an eligible expense when qualifying for an Investment Tax Credit?

The ITC is calculated by multiplying the applicable tax credit percentage by the “tax basis”- or the amount spend on eligible property:

  • Solar PV panels, inverters, racking, balance-of-system equipment, sales and use taxes on the equipment
  • Concentrating Solar-Thermal Power (CSP) equipment used to generate electricity, heat or cool a structure or to provide solar process heat
  • Transformers, circuit breakers, and surge arrestors
  • Energy storage devices that have a capacity rating of 5 kilowatt hours or greater
  • Interconnection property costs to enable distribution and transmission of the electricity produced for projects 5MW or less

Why does the Inflation Reduction Act include “labor requirements” as a determining factor when issuing tax credits?

The Inflation Reduction Act (IRA) changed the tax code to encourage companies to invest in energy security, reduce carbon emissions, and increase energy innovation. The prevailing labor wages are set by the Treasury Department to draw workers into the solar industry.

To qualify for the full ITC or PTC, projects must satisfy all labor requirements (based on the prevailing wage) for construction, alteration, and repair:

  • ITC – first 5 years of the project
  • PTC – first 10 years of the project

The Inflation Reduction Act includes additional “bonus” credits, what are they?

  • Domestic Content Bonus
    To qualify, all steel or iron used in the project must be produced in the United States and a required percentage of the total costs of manufactured products will be mined, produced, or manufactured in the United States.
  • Energy Community Bonus
    An energy community is considered:
    1.  A brownfield site-real properties that are seen as contaminated even if they aren’t (for example, former gas stations)
    2.  An area – after 2009 – had a 0.17% or more direct employment rate or 25% more local tax revenues that were related to the extraction, processing, transport, or storage of coal, oil, or natural gas, and has an unemployment rate at or above the national average for the previous year
    3.  A census tract in which a coal mine closed after 1999, or a coal-fired electric generating unit has retired after 2009
  • Low Income Bonus
    Only available to projects using the ITC and is subject to a 1.8 GW program cap per year. The bonus is given to projects that are under 5 MW in the following ways:
    1.  An additional 10% ITC for being located in a low-income community
    2.  An additional 20% ITC for being classified as a “qualified low-income residential building project” or “qualified low-income economic benefit project”

Does the Inflation Reduction Act set forth any time restrictions for the ITC or PTC?

Yes – The ITC, PTC, and associated bonus credits are scheduled to phase out in 2032. They could be eliminated sooner, however, if the Treasury Secretary determines there has been a 75% reduction in annual greenhouse gas emissions when measured against 2022 levels.