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The Green Energy Tax Incentives Of The Inflation Reduction Act Of 2022 – Oil, Gas & Electricity


Last Wednesday night, after weeks of negotiations, US Senators
Joe Manchin and Chuck Schumer reached a deal on an energy and
healthcare bill titled the Inflation Reduction Act of 2022 (the
“Act”).1 The Act includes extensive provisions relating
to green energy tax incentives. Although these provisions
incorporate the general tax credit framework from the previously
released Build Back Better Act (the “BBBA”), there are a
number of noteworthy deviations, some of which were largely
unexpected.

Key green energy tax provisions are listed below, with a more
detailed analysis following the bullet point outline.

  • Extension of the solar investment tax credit (“ITC”)
    and renewable electricity production tax credit (“PTC”)
    for projects that begin construction before January 1, 2025.

  • ITC and PTC reduction for projects that fail to satisfy
    prevailing wage and apprenticeship requirements, but deemed
    satisfaction of such requirements for projects that begin
    construction prior to the date that is 60 days after Treasury
    issues guidance related to these

  • Bonus ITC and PTC for projects that satisfy certain domestic
    content requirements or that are located in “energy
    community” or low-income community areas.

  • ITC expanded to standalone storage and limited interconnection
    property (but not transmission property more generally).

  • Extension of the carbon capture credit for projects that begin
    construction before January 1, 2033, and expansion of the carbon
    capture credit and reduction of carbon capture

  • Direct pay option for certain governmental and tax-exempt
    entities.

  • Option for taxable entities to transfer the ITC and PTC to
    third parties for cash.

  • 3-year carryback period for the PTC (but only for projects that
    are placed in service after December 31, 2022) and for the
    ITC.

  • A 15% minimum tax on corporate taxpayers with adjusted
    financial statement income in excess of $1 billion, effective for
    taxable years starting after December 31, 2022, with the ability to
    apply the ITC and PTC to reduce up to 75% of the minimum tax in
    excess of $25,000.

  • Projects placed in service after December 31, 2024, entitled to
    a new, technology-neutral investment tax credit and production tax
    credit regime. The new technology-neutral credits will be subject
    to phaseouts for projects beginning construction after the later of
    2032 and the date certain emissions targets are satisfied.

  • Extension of the tax credit for new electric vehicles for those
    placed in service after December 31, 2022, and elimination of the
    per-manufacturer limit. However, there will be an income limitation
    and a phased-in domestic content requirement for the electric
    vehicle battery. The new domestic content requirement is likely to
    substantially limit the usefulness of this credit.

  • A new tax credit for purchases of used electric vehicles, which
    will also be subject to an income

  • A new tax credit for commercial electric vehicles.

Extension and Modification of the PTC

The PTC would be extended to projects beginning construction
before January 1, 2025.

The Act retains the substance of the revised PTC structure set
forth in the BBBA. Specifically, the PTC would consist of a base
credit in an amount equal to 20% of the available credit, an amount
that would be multiplied by 5 if certain prevailing wage and
apprenticeship requirements are satisfied. It should be noted that
these prevailing wage and apprenticeship requirements would be
treated as satisfied if a project begins construction prior to the
date that is 60 days after Treasury issues guidance related to
these provisions. In addition, a bonus 10% PTC is available if
certain “domestic content requirements” are met or if the
project is located in an “energy community” (e.g.,
brownfield sites). The PTC would also become available for solar
projects.

While the extension of the PTC obviates the need to demonstrate
beginning of construction in the near future for the purpose of
qualifying for the base credit, demonstration of beginning of
construction remains relevant for purposes of the deemed
satisfaction of the prevailing wage and apprenticeship requirements
for projects that begin construction prior to the date described
above. Thus, we expect that developers will continue to safe harbor
projects to avoid being subject to the prevailing wage and
apprenticeship requirements. Although the existing IRS guidance
with respect to beginning of construction does not contemplate
demonstration of beginning of construction for this specific
purpose, the guidance is broadly drafted to apply to beginning of
construction generally, and we are not aware of any policy reason
that a different standard should apply for purposes of the
prevailing wage and apprenticeship requirements.

Accordingly, we expect that the same beginning of construction
standard under current IRS guidance will apply for purposes of the
prevailing wage and apprenticeship requirements. With respect to a
project that has already begun construction, under existing IRS
guidance, a taxpayer must make continuous progress toward
completion once construction has begun. However, this continuity
requirement is deemed satisfied if the project is placed in service
by an outside date. For example, under current IRS guidance, a wind
project that began construction in 2016 must be placed in service
prior to January 1, 2023, in order to be deemed to satisfy the
continuity requirement; otherwise, the project would need to
demonstrate actual continuity throughout construction in order to
be eligible for the 100% PTC. Under the Act, as long as the project
clearly began construction prior to 2025 (e.g., it is placed in
service prior to 2025), the project would be eligible for the 100%
PTC even if it fails to be placed in service by January 1,
2023.

In general, the extension of the PTC would apply for projects or
equipment placed in service after December 31, 2021. However,
certain provisions, including the bonus for domestic content, would
apply only for projects placed in service after December 31,
2022.

Extension and Modification of the ITC

The ITC would be extended to projects beginning construction
before January 1, 2025.

The structure of the ITC would follow the general structure of
the PTC described above, with a 6% base credit, a percentage that
would be multiplied by 5 if certain prevailing wage and
apprenticeship requirements are satisfied. Like the PTC, the ITC is
subject to a 10% bonus credit if certain “domestic
content” requirements are met or if the project is located in
an “energy community.” For the ITC (but not the PTC), an
additional 10% bonus credit is available for projects of less than
5 megawatts (AC) located in “low-income communities” (or
20% in the case of projects that are part of a qualified low-income
housing project or qualified low-income economic benefit
project).

As with the PTC, despite the extension of the ITC, demonstration
of beginning of construction remains relevant for purposes of the
deemed satisfaction of the prevailing wage and apprenticeship
requirements.

The Act also expands the scope of ITC-eligible property to
include, among other things, standalone storage and certain
interconnection property. However, the inclusion of interconnection
property is very narrow and limited to projects that are no greater
than 5 megawatts and only to the extent the interconnection
property is an upgrade to an existing transmission or distribution
system and is necessary to accommodate the interconnection of such
system to an applicable project. To be eligible for the ITC on
standalone storage, construction must begin prior to January 1,
2025.

The inclusion of standalone storage is a welcomed and
much-needed development for the solar industry. Under current law,
a storage system must be coupled with qualifying “energy
property” (e.g., a PV system) in order to be eligible for the
ITC. As a result, there is some uncertainty as to the standard for
determining whether a storage system is eligible for the ITC,
particularly when the storage system is installed after the
corresponding PV system has already been placed in service. With
the expansion of the ITC to standalone storage, a developer would
be able to add a battery system to an existing project and claim
the ITC on such addition.

In general, the extension of the ITC would apply for projects or
equipment placed in service after December 31, 2021. However,
certain provisions, including the bonus for domestic content, would
apply only for projects placed in service after December 31,
2022.

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This
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article provides information and comments on legal
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