What Qualifies for Business Energy Tax Credits?

According to the Environmental Protection Agency, the Inflation Reduction Act (IRA) of 2022 is the most significant climate legislation in U.S. history, specifically through its various funding, programs, and incentives that aim to accelerate a transition to clean energy by spurring clean energy generation and manufacturing as well as critical minerals processing.

The IRA includes 26 federal energy tax incentives: tax credits, a tax deduction, accelerated depreciation, and tax credit monetization. These key elements are designed to incentivize businesses and individuals to increase their use of renewable and other clean energy, which, according to the White House, will reduce carbon emissions by 50% by 2030 and reach net-zero emissions by 2050.

The new IRA clean energy tax credits and deduction will be available for the next 10 years. While many of the incentives are already in effect, a few will take effect in 2024 or 2025. As a result, individuals and businesses will need to keep up with policy changes and incentives as part of their federal tax planning strategies. The clean energy tax incentives have emerged as a key topic of interest for corporate tax planning professionals.

Here, you’ll find Bloomberg Tax’s latest guidance on corporate clean energy tax credits, including what qualifies and how to claim the credits and deductions available.

What energy incentives are in the Inflation Reduction Act?

The IRA was enacted to help the U.S. meet long-term emissions goals by accelerating investment in and the adoption of clean and sustainable energy, vehicles, and manufacturing. Although the legislation includes 13 new tax incentives for businesses and individuals, the law also extended or expanded 12 existing clean energy tax credits and one existing tax deduction.

Notably, the IRA provides an unprecedented opportunity to monetize the clean energy tax credits, allowing a far broader range of taxpayers to benefit from the credits:

• Energy project owners or sponsors can sell the tax credits in a tax-free transaction.
• Businesses can buy the tax credits at a discount and use them to reduce their tax liability.
• Tax-exempt entities can qualify for direct payments in lieu of the tax credits.

What qualifies for federal clean energy tax incentives?

Any type of business in the U.S. and its territories can explore methods for optimizing tax strategies using the IRA credits. That said, to qualify for clean energy tax credits, businesses must produce or invest in the following resources or elements:

• Solar or wind energy
• Hydrogen power
• Zero-emission nuclear power
• Photovoltaic electricity (the conversion of light into electricity using specific semiconducting materials)
• Alternative energy sources
• Carbon capture and sequestration
• Biofuel
• Clean transportation fuel
• Sustainable aviation fuel
• Energy-efficient improvements to commercial buildings

Energy tax credits are also available for businesses that upgrade to energy-efficient lighting, remediate contaminated sites, or make other investments in environmentally friendly building structures.

Inflation Reduction Act tax credits list

As noted, the federal government implemented these green energy tax incentives to promote more environmentally friendly business practices. The following are the most common tax credits available to businesses. Unless otherwise noted, the credit or deduction applies to taxable years beginning after 2022.

Energy investment tax credit

• What is it and who is eligible? The “energy credit” provides a tax credit for investment in renewable energy (fuel cell, solar, geothermal, small wind, energy storage, biogas, microgrid controllers, combined heat and power) properties, clean hydrogen production facilities (if elected), and qualified interconnection properties.
• Base credit: 6% of a taxpayer’s qualifying investment, 30% credit for projects with a maximum net output of less than 1 megawatt of electrical or thermal energy, or projects that meet wage and apprenticeship requirements
• Increases: Credit percentage will increase if certain requirements are met relating to domestic content, location on a brownfield site or in a community facing closures of coal mines or fossil fuel plants, location in a low-income community or on Indian land, and other factors.
• Maximum credit: 70% of investment

Advanced energy project credit

• What is it and who is eligible? This credit is a competitively awarded tax credit for investment in clean energy manufacturing projects. It provides for up to $10 billion of new credit allocations for businesses that invest in manufacturing facilities that produce or recycle clean-energy equipment or vehicles, or invest in facilities that process, refine, or recycle critical materials.
• Base credit: 6% of a taxpayer’s qualifying investment
• Maximum credit: 30% of the qualifying investment amount for projects that meet wage and apprenticeship requirements

Biodiesel, renewable diesel, and alternative fuel credits

• What is it and who is eligible? Producers of biodiesel, renewable diesel, or biodiesel mixtures are eligible for these credits
• Base credit: $1 per gallon of biodiesel, renewable diesel, or biodiesel mixture
• Bonus: Additional 10 cents per gallon for small agri-biodiesel producers

Carbon oxide sequestration credit

• What is it and who is eligible? The IRA extended and enhanced the credit, available to qualified industrial facilities and direct air capture facilities, for carbon oxide sequestration coupled with permitted end uses within the United States.
• Base credit: Ranges from $12-$36 per metric ton of qualified carbon oxide captured by the taxpayer
• Maximum credit: Ranges from $60-$180 if the facility meets wage and apprenticeship requirements

Clean electricity investment tax credit

• What is it and who is eligible? This new provision, applicable to qualified property placed in service in 2025 or later, will replace the energy investment tax credit. The clean electricity investment tax credit is a credit for investment in facilities that generate clean electricity with a zero greenhouse-gas emissions rate, as well as qualified energy storage technologies.
• Base credit: 6% of the taxpayer’s qualifying investment, or 30% of qualifying investment for projects with a maximum net output of less than 1 megawatt of electrical or thermal energy, or projects that meet wage and apprenticeship requirements
• Increases: Credit percentage will increase if certain requirements are met relating to domestic content, location on a brownfield site or in a community facing closures of coal mines or fossil fuel plants, location in a low-income community or on Indian land, and other factors.
• Maximum credit: 70% of investment

Advanced manufacturing production credit

• What is it and who is eligible? This new credit is available to manufacturers of solar, wind, or battery components; inverters; and critical minerals produced in the U.S. and sold by the manufacturer to an unrelated person. It is not available for property produced at facilities that received the advanced energy project credit.
• Base credit: Varies by component type

Advanced manufacturing investment credit

• What is it and who is eligible? This new credit is available to domestic manufacturers of semiconductors and of equipment used to manufacture semiconductors.
• Base credit: 25% of the taxpayer’s investment in a qualified manufacturing facility

Energy-efficient commercial buildings deduction

• What is it and who is eligible? Owners and long-term lessees of commercial buildings in the U.S., as well as designers of energy-efficient building property and tax-exempt owners of commercial properties, can receive this tax deduction for funding improvements to the energy efficiency of commercial buildings. This could include changes to the heating, ventilation, or lighting systems, among other elements.
• Base credit: $0.50-$1 per square foot. Alternatively, taxpayers may deduct 100% of their adjusted basis in “qualified retrofit plans” that reduce the building’s energy use intensity by at least 25%.
• Maximum credit: $2.50-$5 per square foot if wage and apprenticeship requirements are met. There is no maximum if the taxpayer deducts basis in a qualified retrofit plan.

Qualified commercial clean vehicle credit

• What is it and who is eligible? Businesses or organizations that purchase qualified commercial clean vehicles are eligible for this new tax credit.
• Base credit: Either 15% of the vehicle cost (30% of vehicle cost if not powered by a gasoline or diesel engine) or the vehicle’s purchase price minus the price of a comparable internal combustion vehicle, whichever is less
• Maximum credit: $7,500 for vehicles weighing less than 14,000 pounds; $40,000 for all other commercial clean vehicles

How to claim clean energy tax credits and rebates

The process for claiming IRA clean energy tax credits and incentives depends on the type of credit you’re seeking, as some credits require a thorough application that details the qualifying investment, while others simply require filing a tax form.

For example, to claim the advanced energy project credit, applicants typically go through a four-step review process that the U.S. Department of Energy must approve. But for the new qualified commercial clean vehicle credit, just one taxpayer from the business needs to fill out Form 8936, per the IRS.

In addition, the IRA created two new ways for businesses to monetize tax credits generated by their projects: direct pay and transferability. Energy project owners and sponsors of such products can use both.

Direct pay

The direct pay election, sometimes referred to as the elective payment election, effectively makes certain clean energy tax credits refundable to qualifying entities, which include:

• Tax-exempt organizations
• State and local governments and their political subdivisions, agencies, and instrumentalities
• Indian tribal governments
• Alaska native corporations
• The Tennessee Valley Authority
• Rural electric cooperatives

These entities can elect to be treated as making a payment against tax in lieu of claiming the credit. The electing entity receives a refund of the credit amount to the extent it exceeds the entity’s income tax liability.

Additionally, all taxpayers may make a direct pay election for three credits: the clean hydrogen production credit, carbon oxide sequestration credit, and the advanced manufacturing production credit. But this can only be done for the first five taxable years beginning with the year the qualifying project is placed in service.

Transferability

Transferability, on the other hand, allows persons who qualify for a tax credit and are ineligible for direct pay to elect to sell a portion of the credit or the entire credit to an unrelated buyer in exchange for cash in a tax-free transaction. To be eligible to sell a tax credit, the seller must be subject to a U.S. internal revenue tax. This includes entities that have a U.S. employment tax or excise tax obligation, even if they don’t have a U.S. income tax obligation. If the credit-qualifying facility or property is held directly by a partnership or S corporation, then only the partnership or S corporation – not a partner or shareholder – can make the transfer election.

Spend less time on research tasks and more time on tax strategy with Bloomberg Tax

All in all, the provisions within the Inflation Reduction Act are meant to accelerate a transition to clean energy by creating strong corporate incentives for investment. Over the next decade, these new and expanded clean energy tax credits and deductions will be a key part of corporate federal tax planning strategies. Our Roadmap of Direct Pay and Credit Transfer Proposed and Temporary Regulations summarizes the new clean energy tax credit direct pay and transferability elections as well as the mandatory pre-filing registration requirements for those elections.

Bloomberg Tax Research is an essential resource for tax professionals who want to stay up to date with changing regulations and how it may affect their corporate tax planning. Our expert analysis, timesaving tools, and comprehensive coverage of legislative and regulatory changes that may impact business tax credits can help you understand your eligibility and potential tax benefits while ensuring you stay in compliance.