Helping Clients Win the Race for US Clean Energy Tax Credits

With a one-month application window, companies aiming to qualify for some of the $10 billion slice of the qualified advanced energy project tax credit face a time crunch, along with competition from a potentially large applicant pool.

To be considered for the credit, taxpayers must follow a complex, two-step process laid out in the Treasury Department’s extensive second round of guidance released on May 31. The Department of Energy and Treasury will host an information webinar for potential applicants on June 27.

The program, included under Section 48C of the tax code, is among more than two dozen tax provisions in the Inflation Reduction Act aimed at developing clean energy. It’s an extension of a tax credit enacted in 2009 that has expanded to provide a transferable, or sellable, tax credit covering up to 30% of the total costs for projects, including clean energy manufacturing and recycling, industrial decarbonization, and critical materials processing, refining and recycling.

Companies that consider the following will help position themselves for success in securing this funding based on what the Energy Department has stated as a priority.

Clearing the First Hurdle

The first step in qualifying for the tax credit is submitting a concept paper between June 30, when the online portal for concept paper submissions opens, and July 31. The purpose of this step is to save time by weeding out projects that are unlikely to move forward. The paper must be no longer than four pages, but don’t be fooled by the length—the requirements can be onerous for the untested.

Applicants will want to make sure the clean energy project meets eligibility requirements in the law and guidance, including meeting the definition of a qualifying energy project. They also must address how the project aligns with the five general selection criteria in the guidance, outlining how the project will:

Provide the greatest domestic job creation (both direct and indirect) during the credit period.
Offer the greatest net impact in avoiding or reducing air pollutants or anthropogenic emissions of greenhouse gases.
Have the greatest potential for technological innovation and commercial deployment.
Have the lowest levelized cost of generated or stored energy, or of measured reduction in energy consumption or greenhouse gas emission, based on costs of the full supply chain.
Have the shortest project time from certification to completion.

The Energy Department will determine if the project aligns with the five criteria and the administration’s stated policy goals and priorities, based on four technical criteria:

Commercial viability
Greenhouse gas emissions impacts
Strengthening US supply chains and domestic manufacturing for a net-zero economy
Workforce and community engagement

This is where it becomes critical for companies to ensure they either have secured the advice of a seasoned practitioner or have activated internal practitioners with deep expertise to build and relay a compelling business case.

Commercial viability and greenhouse gas impact arguably are more clearly defined in existing guidance. Let’s take a closer look at the last two criteria, which historically have been more of a heavy lift for companies to meet.

Supply Chains and Manufacturing

The May 31 guidance indicates the Energy Department will consider whether, and how effectively, the project impacts one or more of the following round one eight priority areas:

Clean hydrogen
Electric grid
Electric heat pumps
Electric vehicles
Nuclear energy
Solar energy
Sustainable aviation fuels
Wind energy

Applicants must clearly explain in their concept paper the extent to which the proposed project addresses current and anticipated supply chain gaps and vulnerabilities for clean energy. They also must show how the project facilitates progress in line with the long-term US strategy to achieve net-zero emissions.

Workforce and Community Engagement

Applicants should be well aware of Section 48C prevailing wage and apprenticeship requirements that boost the 6% base credit up to 30% of total project costs. In addition to meeting these requirements, the May 31 guidance expands upon the community and workforce impacts that the Energy Department will consider when evaluating which projects it will recommend to move forward. Applicants should be prepared to address the following questions:

How many jobs will the project create, including jobs in energy communities or attained by people previously employed in the coal, other energy, and automotive industries? Will those jobs come with employer-sponsored benefits and training?
To what extent has the company engaged community and labor stakeholders?
What is the environmental impact to the surrounding community, including clear plans to avoid or reduce air pollution, land, and water contamination?
What are the specific, measurable benefits created for disadvantaged communities, including energy communities?

This is an area where tax practitioners can help applicants by making sure their intentions are clearly stated and that they have a process to work with contractors or employees to meet all workforce and community impact requirements. All these nuances should be concisely addressed in the concept paper.

Sprint to the Finish

With concept papers due soon, companies are racing against time and stiff competition for a share of the $10 billion. The more that companies can align themselves with the identified key priorities and criteria, the more compelling their case will be.

Understanding the priorities and the Energy Department’s evaluation process is essential to putting together a standout concept paper that will help them get the green light for step two—the application process.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Kristen Gray is EY Americas’ sustainability tax leader. The views expressed are those of the author and do not necessarily reflect the views of Ernst & Young LLP or others member firm of the global EY organization.