The Inflation Reduction Act of 2022 (“IRA”) offered several incentives for the construction industry, including an update of the deduction for energy efficient property installed at commercial buildings under Section 179D of the Internal Revenue Code of 1986, as amended (the “Code”). The CHIPS Act of 2022 also included an advanced manufacturing investment credit under Section 48D of the Code for the erection, construction or re-construction of a manufacturing facility used for the manufacturing of semiconductors or semiconductor manufacturing equipment.
The IRA updated the qualifying advanced energy project credit under Section 48C of the Code, providing for an additional $10 billion of tax credits for qualifying investments in projects that could meet certain criteria. The Secretary of the Treasury in conjunction with the Department of Energy will establish a program for the review and approval of project applications. This tax credit incentivizes the construction of manufacturing facilities that manufacture green energy equipment in the United States. The Administration is calling on U.S. industry to create the green energy economy and provide employment opportunities within the United States. The credit rate jumps from 6% to 30% of the cost of the investment for those projects meeting certain wage and apprenticeship requirements. In addition, $4 billion of the $10 billion must be allocated to certain “energy communities” as described below.
- What is the Credit For?
There are three types of projects that may qualify: (i) manufacturing facilities that manufacture equipment such as solar panels, wind turbines, hydro-electric turbines, fuel cells, electric grid modernization equipment, and certain electric or fuel cell vehicles; (ii) the renovation or re-equipping of existing facilities with equipment that reduce greenhouse gas emissions by 20 percent; and (iii) the construction of a facility that manufactures, refines or processes critical materials for the green economy, such as Lithium, Cobalt and Nickel. Treasury Department Notice 2023-18 provides additional details and includes a link to the full list of critical minerals.
2. The Requirements
Treasury Department Notice 2022-51 outlines the prevailing wage and apprenticeship requirements for the projects. The project has to ensure that the laborers and mechanics working on the construction receive wages that meet Department of Labor prevailing wage standards, including after the project is placed in service for a period of five years. In addition, the work force must contain a certain number of qualified apprentices that are registered with state or federal apprenticeship programs.
Notice 2023-29 describe three “energy community” categories, which are (i) the statistical area category regarding regions with unemployment rates above certain levels; (ii) the brownfield category relating to sites classified as brownfields under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”); and (iii) the coal closure category, census tracts or adjoining tracts where a coal mine or coal-fired electric plant has been retired. It is important to note that $4 billion of credits has been earmarked for these sites, so if the project can be located within an energy community, that would increase the chance of its success in receiving an allocation of tax credits.
3. Notice 2023-18
The Treasury Department issued Notice 2023-18 in February, which outlines the process which begins on May 31, 2023. It should be noted that the Notice states additional guidance should be issued before the end of May to assist taxpayers understanding the process. Stay tuned for more information.
Beginning May 31 and running through July 31, a taxpayer (project developer) must submit a concept paper to the Department of Energy for pre-approval of the proposed project. After its review, the Department of Energy will issue a letter either encouraging or discouraging the taxpayer to submit an application to the Treasury Department for a certification of tax credits. If the taxpayer receives a favorable letter, it will submit an application for the Treasury Department to certify an allocation of tax credits to the project. After review, the Treasury Department will issue the certification and allocation letter if the project meets the criteria. If the number of taxpayers applying for credits exceeds the $10 billion threshold, or the $4 billion threshold for projects located in energy communities, then the project will need to beat its competitors to receive an allocation of tax credits. The Department of Energy will rank the projects in terms of merit, so it is important that taxpayers advocate for their projects when submitting the concept paper this year.
It should be noted that there are anti-duplication provisions which prevent doubling up on tax credits for investments that qualify for automatic credits under other provisions of the Code. For example, a taxpayer cannot make an investment in carbon capture equipment that automatically qualifies for tax credits under Section 45Q of the Code and also apply for additional tax credits under Section 48C for the same investment.
Taxpayers that have business plans to erect, construct or re-equip advanced energy projects should begin to prepare a convincing argument as to why their projects have superior merit to other projects. Projects that do not plan to meet the prevailing wage and apprenticeship requirements should reconsider that decision. Notice 2023-29 provided mapping tools to find “energy communities” via links to various government websites. If the project can be located within an “energy community,” that would improve a project’s chances of receiving an allocation of tax credits as an advanced energy project. To find out more, taxpayers can click here.
Jim Reardon has more than thirty years of experience representing private and public companies in corporate and tax matters. As a counselor to closely-held partnerships, limited liability companies, S corporations, and their ...
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