The Inflation Reduction Act modified several clean energy initiatives, expanding Section 48C of the tax code dealing with advanced energy project credit and introducing advanced manufacturing production credits in Section 45X. This article will detail the differences between them and how tax professionals can advise their clients how best to apply each of these credits.
Advanced Manufacturing Production Credit
Section 45X is intended to promote the production of eligible components and applicable critical minerals within the domestic supply chain. Eligible components are units of tangible property integral to the performance of machinery and equipment used to capture, convert, store, or transmit energy from alternative fuel sources. This specifically includes energy from wind, solar, and the production of applicable critical minerals.
Eligible components are made up of a variety of sub-components, each assigned a specific credit amount—solar grade polysilicon’s credit equals $3 per kilogram, for example—on a production-unit basis under Section 45X(b). The total credit for any year is equal to the sum of credits allocable to each subcomponent produced in the US and sold during the tax year to an unrelated person in the ordinary course of a taxpayer’s trade or business.
The credit for eligible components is reduced to 75%, 50%, and 25% of the original credit for property sold during calendar years 2030, 2031, and 2032, respectively. Eligible components sold after calendar year 2032 are not eligible for the credit.
Applicable critical minerals include 50 specified rare earth elements, carbon materials, and other natural resources integral to the development of a decarbonized energy infrastructure in the United States.
The total credit amount in any year is equal to 10% of the costs incurred by the taxpayer with respect to production of the mineral. Production of applicable critical minerals includes conversion and purification. Although standards vary, most applicable critical minerals must be purified to a minimum purity above 99% by mass.
Note, the term eligible component does not include property produced in a Section 48C facility.
Qualifying Advanced Energy Project Credit
The newly modified Section 48C promotes investment in facilities used in the manufacture of eligible clean-energy property. Taxpayers likely will have a choice as to claim Section 48C or Section 45X, as the two credits can’t be claimed on property produced in the same facility.
Unlike Section 45X, the credit under Section 48C is awarded through a program established by the Treasury Department and the IRS. That program recently has been described in IRS Notice 2023-18.
The total credit for any year is equal to 30%, provided the taxpayer meets the prevailing wage requirements with respect to any laborers and mechanics employed by the taxpayer, or any contractor or subcontractor in the construction.
A qualifying advanced energy project includes investment in a facility that:
- Is designed for the production or recycling of specified advance energy property, including property designed to produce energy from the sun, water, wind, geothermal deposits, and other alternative fuel sources;
- Re-equips industrial or manufacturing facilities with equipment designed to reduce greenhouse gas emissions by at least 20% through the installation of specified energy efficient systems; or
- Re-equips, expands, or establishes an industrial facility for the extraction, processing and refining, or recycling of critical materials.
A taxpayer’s qualifying investment is equal to the aggregate basis of property necessary to complete the qualifying advanced energy project. The property must be either depreciable tangible personal property, or other depreciable tangible property (excluding a building and its structural components) that is an integral part of a qualified investment credit facility.
A qualified investment doesn’t include the basis of property for which a credit is allowed under Sections 48, 48A, 48B, 48E, 45Q, or 45V and limited to tangible personal property.
Importantly, merely qualifying under the requirements of Section 48C will not guarantee a credit to an otherwise qualifying investment. Section 48C establishes a program to consider and award certifications for qualified investments eligible for credits and goes into effect May 31, 2023. Under the initial program rules, the total allocable credits are $4 billion, with $1.6 billion being allocated to projects in certain energy communities.
Limitations and Other Considerations
Prevailing wage requirements: Taxpayers can receive an enhanced credit if they meet the prevailing wage and apprenticeship requirements. They also risk substantial penalties if they fail to meet the requirements after claiming a related enhanced credit. The penalty is $5,000 per underpaid employee, increased to $10,000 with a finding of intentional disregard. Additionally, the taxpayer must remit an amount equal to the difference between actual wages paid and prevailing wages, plus interest.
Administrative guidance IRS 2022-61 details the prevailing wage determination and required documentation, including a 60-day safe-harbor for activity that begins after the date of issuance—Nov. 30, 2022. Under this safe-harbor, the prevailing wage and apprenticeship requirements must be satisfied if the activity begins on or after Jan. 29, 2023 (60 days after the publication), after which taxpayers must apply the requirements at the risk of penalty.
Details on what prevailing wages are for specific types of projects in specific areas are on sam.gov.
Transferability and direct pay: Taxpayer-friendly implementation measures create direct pay options for certain entities and allow the transfer of credits between unrelated taxpayers.
Under Section 6417, tax-exempt organizations, states, political subdivisions, and other applicable entities may now elect to receive a direct payment, in lieu of credit against tax, equal to the amount of an otherwise allowable credit. A taxpayer who does not qualify for the direct pay option may, under Section 6418, transfer all or a portion of the credit to an unrelated taxpayer in exchange for cash in a non-taxable event.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Jaime Garcia de Paredes is a tax manager in Eide Bailly’s national tax office. His practice includes income tax accounting methods, periods, and credits.
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