The federal tax incentive for qualified energy property was extended through the Inflation Reduction Act (IRA) for most projects that begin construction before January 1, 2025 (2035 for geothermal energy used for healing and cooling a structure).
Taxpayers are allowed a credit for a portion of the expenditures they make in placing energy property in service. Energy property, for purposes of the energy credit, consists of specifically listed energy-related property, and a second list of qualified energy-related property eligible by irrevocable election to be treated as energy property.
The credit is equal to the energy percentage of the basis of the energy property placed in service during the taxable year. The base energy percentage is decreased to 6% (previously generally 30%) for the following property:
- Qualified Fuel Cell Property
- Equipment that uses solar energy to generate electricity, to heat or cool a structure, or to provide solar process heat other than for heating swimming pools (if construction begins before January 1, 2025)
- Qualified Small Wind Energy Property
- Waste Energy Recovery Property
- Standalone energy storage*
- Qualified biogas property*
- Microgrid controllers*
- Qualified microturbine property
- Combine heat and power system property
*IRA expanded to include these 3 new technologies.
All other energy property will have a percentage of 2%. The energy property can be acquired by the taxpayer as new property, or a taxpayer can construct or reconstruct such property.
Generally, a taxpayer is allowed to maximize the credit to 30% of the basis of qualified energy property (or 10% of the basis for all other energy property) if one of the following conditions is met:
- A project with a maximum net output of less than 1 megawatt of electrical (as measured in alternating current) or thermal energy; or
- The taxpayer ensures that any laborers and mechanics employed by the taxpayer, contractor, or subcontractors, in construction of the energy project or repair of the energy project for the first five years after it is placed in service are not less than the prevailing rates for construction. In addition, a certain number of labor hours for the energy project must be performed by qualified apprentices.
If the energy project satisfies one of the requirements above and meets the domestic content requirements the credit can be further increased by an additional 10%. Lastly, if the project is located in a designated energy community (including a brownfield site and certain low-income areas) and passes one of the two requirements above, the credit can be increased an additional 10%. Therefore, provided a qualified energy property meets the wage and apprenticeship requirements, the domestic content requirement, and is located in a designated energy community the total percentage of basis that can be utilized towards the credit is 50%. Applicable entities, including tax exempt entities, state or local governments, and Indian tribal governments can make a direct pay election for this credit to effectively treat the tax credits as taxes paid on a filed return. The transferability election under §6418, allowing taxpayers to transfer all or a portion of the credit to an unrelated party for a one-time transfer of cash, is also available for the energy investment tax credit.
For more information on this topic, please contact a member of Withum’s Business Tax Services Team.