The Inflation Reduction Act of 2022, P.L. 117-169, represents a monumental and unprecedented investment in the adoption and expansion of renewable and alternative energy sources. The legislation provides $369 billion to (1) incentivize and accelerate the buildout of renewable energy; (2) advance the adoption of electric vehicle technologies; and (3) improve the energy efficiency of buildings and communities.

Before discussing these changes and their implications for taxpayers in more detail, a high-level summary may be helpful.

Broad overview

With respect to energy transition and renewable energy, the Inflation Reduction Act:

• Includes a two-tiered credit structure for many of the applicable tax credits, under which there is a base amount, which can be increased to a bonus amount, so long as requirements to pay prevailing wage rates and employ qualified apprentices for a certain percentage of the work are met (or an exception applies);
• Includes, for tax credits related to certain technologies, an additional credit amount based on meeting domestic content requirements;
• Includes a direct-pay provision under a new Sec. 6417 (effectively treating tax credits generated by a renewable energy project as equivalent to taxes paid on a filed return), but it applies only in certain circumstances;
• Includes a new transferability provision under a new Sec. 6418, which permits, in certain circumstances, the one-time sale or transfer of certain tax credits (including those under Secs. 30C, 45, 45Q, 45U, 45V, 48, and several others) in exchange for cash;
• Extends the carryback period for certain tax credits to three years;
• Extends and modifies the Sec. 45 production tax credit (PTC) for projects beginning construction before 2025, including a new PTC for solar property and the extension of the geothermal-related PTC;
• Extends and modifies the Sec. 48 investment tax credit (ITC) for projects beginning construction before 2025, including expanding the definition of ITC-eligible property to include energy storage, qualified biogas property, and microgrid controllers, and adds new rules for certain solar and wind facilities placed in service in connection with low-income communities;
• Provides for new technology-neutral, clean-energy-related PTCs and ITCs beginning in 2025;
• Extends and modifies Sec. 45Q carbon capture, use, and sequestration. Related tax credits (including higher credit amounts, a later beginning-of-construction deadline of before Jan. 1, 2033, and lower annual capture requirements);
• Adds a specific clean hydrogen PTC (new Sec. 45V);
• Includes a zero-emission nuclear power production credit (new Sec. 45U);
• Makes changes for biodiesel, renewable diesel, and alternative fuel credits under Sec. 6426 and related provisions; and
• Includes provisions related to electric vehicles and other energy-efficient technologies and clean fuels.

Overall, many of the Inflation Reduction Act’s provisions, at least with respect to energy transition and renewable energy investments, ought to spur development and investment. However, the new energy and climate rules can be complex, and it is important for taxpayers to understand the rules and how they apply to their particular projects.

The discussion below examines many of the energy and climate aspects of the legislation in greater detail.

Two-tiered credit structure

To begin with, the Inflation Reduction Act contains a two-tiered credit amount structure for many applicable tax credits. Specifically, many of the credits have a lower base credit amount that can be increased up to five times if the taxpayer can satisfy applicable prevailing wage or apprenticeship requirements.

In general, under the prevailing wage requirements, the Inflation Reduction Act requires all laborers, mechanics, and workers to be paid the prevailing wage rates that would be earned by similarly employed workers in the relevant area during project construction (and, during the credit term, for repairs and alterations). Separately and subject to certain exceptions, to meet the apprenticeship requirements, qualified apprentices have to perform an applicable percentage of total labor hours for project construction. Further, the Inflation Reduction Act establishes certain options to cure the failure to meet either the prevailing wage or apprenticeship requirements.

Implications: Taxpayers are agdeemedh to have met the prevailing wage and apprenticeship requirements until 60 days after Treasury provides the required guidance. Although it is difficult to anticipate how long it will take to develop these rules, taxpayers should begin to evaluate their ability to satisfy these critical prevailing wage and apprenticeship provisions now.